Currently, retail giant Amazon has fulfillment centers in 38 of the 50 US states, with more than 75 fulfillment centers throughout North America. With its network of fulfillment and distribution centers spread across the United States, Amazon’s investment in industrial real estate has ensured that the average American is no more than a couple of days away from any of its commercial warehouse facilities. They’re even buying up out-of-business shopping malls and anchor stores to use as distribution centers as they expand operations. Indeed, this e-commerce model is one of the main drivers behind the current commercial industrial warehouse market boom.
What is Commercial Industrial Space?
Generally speaking, there are three main types of commercial real estate: retail, office, and industrial properties. Within the industrial market, there are several types of industrial properties. In this article, we focus on industrial warehouses: the pros and cons of owning a warehouse, logistics to consider, and current warehouse trends.
Tenants of warehouse properties vary but can be either logistics of distribution companies. Furthermore, commercial industrial warehouses come in all shapes and sizes, from small spaces to massive fulfillment centers. Some of the nations’ largest industrial warehouses are:
- The Boeing Everett Factory in Washington State, which also ranks as the biggest warehouse in the world as of 2019 reports. The warehouse measures 4.3M SF, with plenty of space to manufacture some of the world’s largest airliners.
- John Deere’s 2.6M SF Milan, Illinois factory and North American distribution center; the world’s largest factory parts warehouse.
- Target’s 2M SF Import Warehouse in Lacey, Washington, which serves as a distribution hub for the company.
- Tesla’s 500,000 SF warehouse facility in Fremont, California.
Commercial Warehouse Trends
The industrial warehouse market continues to be a strong CRE investment. As e-commerce continues to boom, more and more companies are searching for smaller warehouse spaces out of which to base their operations. From 2014-2019, rents for warehouse spaces rose more than 33% nationwide.
Although these trends were expected to continue into 2020, COVID-19 completely changed the retail and real estate landscape.
According to CRE news leader Globe Street, the novel Coronavirus is driving unexpected changes in the commercial real estate market, particularly with regards to warehouse space.
The May 2020 report highlights several anticipated impacts to the warehouse industry:
- Changing supply chains mean more businesses now need additional storage and manufacturing space.
- The rise in e-commerce sales is driving the need for warehouses.
- Increased focus on supply chain issues is likely to cause long-lasting changes.
- Land zoned for commercial properties, specifically warehouses will become valuable and will be attractive options for investors.
- Global supply chain issues have highlighted the need for American companies to manufacture in-country rather than overseas. Therefore, many companies will need warehouse manufacturing facilities to meet this goal.
- The industrial industry will likely prove more resilient than other commercial real estate properties amid the pandemic.
Things to Consider When Investing in Industrial Real Estate
For investors, warehouses may prove to be stable investments in the coming years, particularly as companies adjust to business in a pandemic.
But if you’re considering investing in warehouse property, there is more to consider than merely the square footage of the space. Consider the needs and desires of local businesses, as well as current real estate trends in your area.
Below are three key factors to look at when considering a warehouse property investment:
- Ease of Access and Loading – These days, consumers are accustomed to next-day shipping. As a result, distribution facilities and fulfillment centers need operations to be as streamlined as possible. Therefore, trucks need easy access to the facility. Also, getting them loaded and/or unloaded should be as simple as possible. An industrial property needs full-height loading docks to make loading and unloading easy.
- Location – In the logistics and distribution businesses, location is everything. Overall, facilities that are near major transportation arteries (expressways, railways, shipping ports) are more desirable than those further away. The further away the property is from these arteries, the more time and fuel the company will spend transporting these goods.
- Height – A property’s square footage only denotes its floor space. However, you must also consider the facility’s vertical capacity (the available height inside the property). Also referred to as ‘clear height,’ this is the measurement of the space under the property’s roof. Specifically, clear height refers to unobstructed space within the building. This measurement represents the stacking potential of warehoused contents like crates and boxes.
Pros and Cons of Investing in Industrial Real Estate
Investing in commercial warehouse properties has both advantages and disadvantages. Yet as is the case with any investment, knowing both the upside and potential downside can help you make informed decisions.
To assist you in making the best investment choice, below are some pros and cons of investing in industrial real estate.
- Compared to the other types of commercial real estate (office and retail), industrial warehouses often offer and higher ROI (return on investment).
- Warehouse tenants tend to sign longer leases.
- Industrial warehouse spaces are lower maintenance properties. Due to this, owners tend to incur fewer maintenance costs.
- Compared to other commercial properties, warehouse properties tend to cost more upfront. In addition, banks may ask for larger down payments.
- When an industrial tenant vacates, finding new warehouse tenants often takes longer than finding new retail or office tenants.
- Changing technologies may make older warehouses obsolete.
Let CXRE Guide You
Investing in industrial real estate continues to be a safe bet for commercial real estate investors. Whether you’re looking to invest in your first commercial warehouse or expand your commercial industrial space portfolio, we can help. At CXRE, we know the industrial markets and can identify warehouse properties to fit your needs.
Alternatively, if you’re searching for industrial real estate to meet your company’s growing needs, we can also help you find suitable space. No matter what you need, our team can assist you. Contact CXRE’s team of commercial real estate professionals today for more information.