The industrial sector of commercial real estate includes spaces designated for the assembly, storage and distribution of products. Some examples of these assets are:
The meteoric rise of e-commerce, accelerated in 2020 by the pandemic, sparked an increased demand for industrial properties. A December 2022 CommercialEdge report found that the sector reached approximately $79B in sales since the previous year. At the end of Q3 2022, an additional 742M SF were in the pipeline.
3 Types Of Industrial Buildings
Industrial assets, like others, are divided into three classes, which are distinguished by their costs and what they offer to tenants:
Class-A industrial buildings: New builds that provide the highest-quality features and amenities. They are characterized by their pristine aesthetic and modern equipment, and they may have offerings such as fast WiFi and an additional generator for power.
Class-B industrial buildings: Structures defined as Class-B industrial are older than Class-A but still offer high value at a reasonable cost.
Class-C industrial: This class often includes the oldest buildings and typically offers basic utilities.
What Are The Different Kinds Of Industrial Properties?
Manufacturing facilities are spaces where goods can be created and constructed. Manufacturing facilities are typically located in convenient transportation hubs in close proximity to suppliers and customers.
There are two types of manufacturing facilities: heavy manufacturing and light manufacturing. They differ based on the size of the goods being built and the corresponding equipment needed.
Heavy manufacturing supports the creation of large-scale goods and machines for businesses that support industries such as transportation, mining and construction. The size of the equipment means that these facilities would need extensive storage space, high ceilings, strong lighting and safety measures for hazardous materials.
Light manufacturing involves assembling products to be delivered directly to the customer, including clothes, food and beverages, toys and electronics. Because materials are being assembled on a smaller scale, these buildings may include less storage and production space and make room for office space.
Research and development flex spaces typically consist of offices combined with labs so that research equipment can be housed safely and workers can have a separate space to have meetings and work together. R&D spaces should also be able to accommodate the changing nature of the lab.
Truck terminals are warehouses to store trucks until they are used to make shipments. Truck terminals require lots to store trucks for long periods of time. Due to the rise in online shopping during the pandemic, more trucks were needed to deliver goods to customers, increasing the demand for these facilities.
How To Invest In Industrial Real Estate
CRE investors who are looking to own and operate industrial properties may be enticed by the prospect of having a tenant stay for the long term. According to Beverly-Hanks Realtors, the average term of an industrial lease is three years to a decade. However, leases can also last longer. While it may be beneficial to have a single tenant on a long lease, should the tenant leave, the investor may need to make changes to the property to suit the needs of a variety of prospective tenants.
Investors can also purchase shares in a real estate investment trust to avoid the hassle of paying for renovations or other expenses associated with owning industrial properties.
What Are High-Performing Industrial Markets?
Industrial space in port markets, in particular, have been experiencing rising rents and low vacancy rates, thanks to their ability to easily receive and ship goods.
Southern California’s Inland Empire
The Inland Empire’s proximity to a port makes it a desirable location for industrial assets. A December 2022 report by The Registry found that the Inland Empire, which is home to 593.3M SF of industrial space, has been showing signs of good health in 2022. The region’s vacancy rate was at 0.7%, and asking rents rose by 1.3% from the previous quarter, according to the report.
Northern and central New Jersey
The northern and central New Jersey region has experienced growing demand for industrial space due to its optimal location for transporting goods to other regions along the East Coast. According to CBRE, as of March 2022, the region had 338M SF of industrial space, with plans to construct more. Additionally, a Savills report found that as of Q3 2022, the northern New Jersey industrial vacancy rate was 2.4% and asking rates were up 40% from the previous year.
Who Are The Big Players Among Industrial Real Estate Companies?
Prologis is an owner, manager and developer of logistics real estate, helping to coordinate efficient methods of product storage and distribution. As of the end of Q3 2022, Prologis was operating 4,914 logistics properties.
On Oct. 5, 2022, Prologis announced that it had acquired Duke Realty Corp., a REIT that invests in industrial assets. As part of the acquisition, Prologis added 142M SF of logistics properties across the U.S., along with 7M SF being built. The company’s acquisitions, investments and properties under construction amount to about 1B SF around the world.
Blackstone is a private equity firm that invests in CRE properties across a variety of asset classes, including the logistics sector. Its logistics facilities include storage and distribution centers in markets across the globe. The company created Link Logistics in 2019 to focus on providing warehouse and distribution solutions. Link Logistics has 550M SF of properties in 25 U.S. regions.
According to Bloomberg, on Nov. 30, 2021, Blackstone acquired $2.8B in logistics real estate, including 17.4M SF in 102 U.S. buildings and 22 UK buildings.
Clarion Partners is a CRE investment firm with a portfolio that includes 965 industrial properties totaling 213M SF. While the company has industrial properties across the U.S., its largest industrial footprint is in Southern California, with 28.9M SF. Through the Clarion Partners Real Estate Income Fund, the company also managed approximately 10.8M SF of warehouses as of Q1 2022.
On Aug. 25, 2022, Clarion Partners announced the acquisition of an industrial property comprising 110K SF in Chino, California. The three buildings include warehouse and distribution space.
What Are The Key Trends In Industrial Real Estate?
The supply chain crisis has caused uncertainty with regard to when materials would be delivered to warehouses. In an attempt to mitigate delays on the production side, companies began buying supplies in bulk whenever possible and storing large quantities in industrial facilities. However, while having more stock helps eliminate delays, it greatly increases storage needs. This is one of the key factors behind the industrial boom.
That doesn’t mean all companies are going full steam ahead with new facilities. In October 2022, Amazon shut down 44 warehouse facilities across the U.S. and put a pause on plans to open 25 more. During the pandemic, the company had built warehouses to accommodate the rise in e-commerce orders. As the demand for ordering goods online stalled at the beginning of 2022, Amazon was saddled with excess warehouse space and needed to downsize.
Industrial Property Key Facts And Statistics
Crexi listed Northern New Jersey, Miami and New York as the three regions that may provide lucrative investment opportunities within the industrial sector in 2023.
JLL reported in June 2022 that the year’s first quarter concluded with a 2.8% vacancy rate in regions with ports.
CommercialEdge reported in December 2022 that in November, the U.S. industrial vacancy rate had dropped to 3.8%.
Bisnow Top Stories
North Palisade Partners, a CRE firm that invests in industrial assets, acquired a site in Rancho Dominguez, California, for $14M. The 2-acre site will be transformed into an industrial site in response to calls for more industrial operating spaces.
Tech company Lansum International Corp. is set to move into a 155K SF building in Oakland, California, an area that has been experiencing increased interest and momentum in the industrial sector.
To avoid competing for Class-A properties, some companies may find that older Class-B or C buildings with fewer amenities may be more suitable for their needs.
A renowned Taiwanese semiconductor company is investing $40B on a chipmaking building in Phoenix. This follows its investment of $12B on a building on the same site.
Logistics company NFI acquired a warehouse in Eastville, California, for $220M. The 761K SF warehouse is located in Eastville, a city within the Inland Empire, which is building more than 42M SF of industrial space.
Industrial Real Estate
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