Our goal at Limitless Investing is to consistently provide high-quality, alternative real estate opportunities to our Investment Club.
While we continue to believe strongly in the investment thesis for multifamily apartments, we also recognize that there are other real estate asset classes that can provide additional layers of diversification, while also offering unique risk/return profiles.
Let’s dive into an overview of Industrial Real Estate and why you should consider it in your portfolio.
What is Industrial Real Estate?
Industrial real estate represents properties designed for efficient and practical space utilization for businesses that value function over form. These properties are ideal for a range of uses, including manufacturing, research and development (R&D), and the storage and distribution of goods.
The three main categories of industrial real estate are:
Manufacturing: properties utilized for the conversion, fabrication, and/or assembly of raw or partially wrought materials into products or goods. These facilities typically have less than 20% office space and can be further classified based on heavy or light industrial use.
Warehouse: properties primarily used for the storage and/or distribution of materials, goods, and merchandise. They generally have less than 15% office space and modern facilities offer high clear ceiling heights for increased cubic storage space. This category may also include specialized facilities, such as cold or freezer storage for food.
Flex/R&D: industrial facilities designed to offer flexibility in the use of space, also referred to as flex/tech space. They are an office-industrial hybrid that may have 30% to 100% office finish.
What is the Investment Strategy for Industrial Real Estate?
Investments in industrial real estate often involve a “sale-leaseback” strategy, in which a business sells its property to a third-party owner who becomes the landlord, while the business becomes a tenant.
The business continues to operate in the property and enters into a lease agreement with the new owner. The proceeds from the sale of the property provide valuable capital for the business to invest in growth, equipment, and personnel.
What are the Demand Drivers for Industrial Real Estate?
Investors should consider four key factors when evaluating industrial investment opportunities:
Transportation: access to major highways, interstates, intermodal rail, ports, and air freight drive demand for industrial real estate.
E-commerce: Between 2020 and 2021, e-commerce accounted for approximately 40% of all industrial absorption. This demand is particularly strong in larger buildings that can be used as warehouses and logistics centers.
Supply Chain Resiliency: increased focus on bringing production lines to U.S. soil and reducing reliance on imported goods creates new opportunities in the industrial sector. The CHIPS & Science Act signed in 2022 provides over $280 billion in spending over the next decade towards boosting the domestic production of semiconductors and supporting R&D into emerging technologies such as AI, nanotechnology, and quantum computing.
Incentives: large industrial facilities often require collaboration with local city or state agencies to negotiate incentives that can impact location decisions. These properties, such as a manufacturing plant, distribution center, or data center, can offer significant tax benefits, leading cities and states to compete aggressively for larger projects that can boost their tax base and create jobs. Incentives may include tax rebates, low-cost loans, or even free land, significantly affecting a project’s overall cost and return on investment for investors.
What are the Advantages of Investing in Industrial Real Estate?
Investing in industrial real estate offers several key benefits, including:
Greater Diversity: industrial properties offer multiple potential uses, providing greater flexibility to meet changing market demands.
High Demand: due to the flexibility and lack of supply, industrial properties tend to remain occupied for longer periods than other commercial real estate.
Long-Term Tenants and Steady Cash Flow: industrial leases tend to be longer and tenants are more likely to renew their lease than move to a new property, providing stability and steady cash flow.
Low Maintenance Costs: by using a triple-net lease, tenants are responsible for real estate taxes, building insurance, and maintenance costs, in addition to rent and utilities, reducing maintenance costs for investors.
Conclusion
Due to their unique structure and strong demand drivers, industrial real estate investments can often provide investors with more predictable, higher cash flow opportunities to consider.
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