Whether you’re looking for your first real estate investment or your 50th, it’s prudent to consider industrial property.
There are many different types of industrial properties, but one thing they all have in common is that most are used for something other than commercial or residential purposes. Instead, industrial properties are generally focused on production and distribution rather than sales and services.
Industrial property covers a wide range of real estate, including:
- Manufacturing facilities
- Distribution centers
- Flexible spaces
With the rise of online shopping, many commercial and retail spaces have sat empty. That’s not the case with industrial space. U.S. manufacturing growth outpaced the rest of the world at the end of 2022, and many businesses need to store all those online orders somewhere.
The industrial market remains an excellent way to generate long-term income, especially for investors who still need to diversify their portfolios. For investors who own residential, commercial, and industrial property, a stable, profit-producing industrial property can prop up other investments during tough times.
For anyone who wants to cash in on a second industrial revolution, here are 10 things you should know about investing in industrial property.
1. Location is still important
As with residential and commercial real estate, location is still key when investing in industrial property. This is especially important if your industrial property will be used as a shipping or manufacturing hub. Consider zoning regulations and the proximity to highways and airports, and take note of skilled labor in the area.
2. Research industrial property trends
Just because you’re not investing in a residential property doesn’t mean you can ignore vacancy rates, rental rates, and trends in the industrial market. This information will guide your decision-making when it’s time to determine the type of industrial property you’ll invest in.
3. Budget wisely
Industrial properties have unique costs, insurance rates might differ, and the tax structure is undoubtedly different from a residential, retail, or commercial property. You’ll also need to budget for a down payment and real estate agent commission. These can be shockingly high if you’re more accustomed to investing in residential property. If you want to save money, try hiring an agent willing to work for a reduced rate.
4. Get in the zone
Just like taxes and insurance rates differ for industrial properties, so do zoning laws and regulations. Investigating zoning laws should be part of your initial research. In some cases, you may need to file a zoning change application, and you should be aware of how that process works and how long it might take.
5. Be environmentally conscious
Be aware of local, state, and federal environmental laws and regulations that dictate what types of activities can occur in a specific location. In most cases, the rules aren’t flexible because of a property’s proximity to waterways and other sensitive environmental areas.
6. Be a better landlord
The leasing process for industrial properties differs from residential, commercial, and retail properties. Industrial tenants may require different accommodations, and their leases are often longer. Even if the market shifts away from your property’s current use, you’d still have tenants locked into a long lease, allowing you to make money long term.
Some industrial property investors are moving toward shorter lease terms to accommodate tenants who want greater flexibility. This gives landlords more agility if they need to shift their focus and raise rents as the market changes.
7. Take stock of the space
When looking at industrial properties, evaluate their suitability for actual industrial work. Most tenants require adequate ceiling height, high floor load capacity, semitruck access, and loading docks. If potential properties lack these basic attributes, you’ll want to consider the cost of adding them.
8. Electrical concerns
Industrial properties have different electrical needs that are much higher than a standard commercial property. Check to see if the existing electrical infrastructure can handle the demands of your targeted use. A fully equipped electrical grid can help you save money and reduce upfront renovation costs.
9. Keep an eye on trends
Monitor economic trends and political or international policies that may affect industrial real estate.
The transition from brick-and-mortar retail to e-commerce means more distribution centers are necessary at central locations across the U.S. This trend seems to be permanent, which means the demand for this type of industrial property won’t dip anytime soon.
The same cannot be said for all types of industrial properties. For example, if environmental regulations make manufacturing plants impractical in your area, now might not be the best time to invest in that property.
10. Don’t neglect parking
Parking is a critical feature for any type of real estate, and industrial property is no different. You’ll need employee parking. Plan one parking space per 1,000 square feet of warehouse. Add more if you want to expand or add rental storage space.
Consider parking as a future investment. Some parking spaces in hot real estate markets can generate additional income when reserved for monthly rentals.
Benefits of investing in industrial properties
Every type of real estate investment involves some risk, but investing in industrial properties has advantages, too.
There are many different options when it comes to choosing the type of industrial real estate you want to invest in. No matter where you live and what industries are in your area, there’s likely a property that will work for your real estate investment portfolio.
The market isn’t currently saturated with industrial properties, so now’s a good time to invest while supply is low and demand is high. With high demand for industrial properties, you shouldn’t have too much trouble finding long-term tenants.
Long-term tenants mean long-term income. With residential and retail properties, few leases extend beyond five years. Manufacturers are likely to sign longer leases with industrial property owners because they’ll need at least several years to get established in the space. Because leases are longer, managing the property may also be easier.
Industrial properties may have specialized designs depending on their use, but for the most part, they are more straightforward than residential or commercial properties. The simpler the property, the less maintenance it will require.