The quarterly published National Real Estate Investor magazine reports that some of the biggest names in Real Estate continue to show a strong appetite for Industrial assets. With increasing attention from all types of investors, Industrial Real Estate valuations have likewise increased significantly in recent years. The most recent acquisitions register in the billions of dollars for millions of square feet in warehouse space. You can read NREI’s recent articles for free here.
Yet there is still plenty of industrial space to go around. Large institutional buyers like Prologis and Blackstone focus on a particular property profile that allows them to achieve economies of scale and further develop relationships with the nation’s biggest warehouse users. Typically, these big players are chasing A Credit clients like Amazon in big city markets. Overlooked, though, are smaller properties that fill a much broader demand in secondary and peripheral markets. These properties offer smaller, more nimble investors opportunities to participate in a burgeoning market. That is why these are the opportunities we are looking for on a daily basis.
We like Industrial Real Estate as a long-term play because we see inertia in the upward trajectory of e-commerce. Retailers like Wal-Mart and Barnes and Noble often have lower online prices than those charged in store. Amazon and others have responded to the demand for fast delivery by procuring millions of square feet in warehouse space across the country. Further, Cannabis and Hemp operations hurriedly consume large amounts of warehouse space in a short period of time in ever friendlier regulatory environments.
Another terrific fixture of Industrial type properties are the expense ratios when the properties are occupied. Often these properties have NNN leases, meaning the tenant pays most of the expenses associated with the property. That is in stark relief to the expense-heavy multifamily sector where landlords traditionally pay for property taxes, insurance, and make ready for vacant units. In exchange for those reduced expenses, Industrial leases at a lower per square foot price than housing. Still, there are usually far fewer toilets to overflow and doors to break in a 100,000 square foot Warehouse than there are in a 100,000 square foot multifamily complex.
Industrial comes with its own challenges though. The most obvious is potential environmental damage from previous, current, or future heavy industrial uses. This risk can be mitigated with good due diligence and paying for environmental reports that document past uses of the property. Another item to consider with Industrial space, especially in peripheral markets, is the threat of long vacancies where the property has no paying tenants. We are often surprised to see just how short some tenant lease terms can be. For example: we are currently considering an offer on an industrial property where all of the tenants are on month-month leases. Whether or not we decide to move forward will depend on whether or not we can be convinced there is enough market demand to fill any vacancies that might occur when we ask our tenants to sign longer term leases.
That’s why its important to underwrite Industrial properly on the front end. If you’d like to learn more about how we do our underwriting and more about what we do, you can join the Abrecco Group Private Investor Club.
Thank You for taking the time to read our newsletter. We value open relationships and also are big believers in Real Estate education. You’re receiving this message because you’ve expressed an interest in what we are doing. We hope to add value in our every communication.
Warmly,
Joseph Dingman
Founder, The Abrecco Group