Why Industrial Real Estate is the Best Investment

In recent years, industrial real estate has emerged as a highly favorable investment option. Despite economic uncertainty, the industrial sector has not lost its momentum. In fact, according to GlobeSt., industrial rents are expected to increase by 10 percent this year, indicating a positive market outlook for the sector. Read on to see why an industrial real estate investment is the right choice for you.

Industrial Real Estate Update

Since 2019, the industrial market has experienced significant changes and developments. Here is an update on some key aspects:

• Digital Transformation: The industrial sector has seen a surge in digital transformation activities. Internet of Things (IoT), artificial intelligence (AI), and automation technologies have been integrated into many industrial processes, resulting in increased efficiency, productivity, and cost savings.

• Sustainability: In the industrial sector, there is an increasing emphasis on sustainability and environmental responsibility. Companies are rapidly incorporating environmentally friendly practices such as lowering carbon emissions, renewable energy sources, and circular economy models. This trend is being driven by both legal regulations and customer demand for more environmentally friendly products.

• Updated Manufacturing Tactics: Additive manufacturing, sometimes known as 3D printing, has grown in popularity in industrial production. It allows for quick prototyping, customization, and the economical manufacture of complicated parts. Furthermore, advances in robotics, automation, and machine learning have enhanced manufacturing processes, resulting in higher precision, less waste, and faster production.

• Rising Rent Prices: Despite unstable economic conditions in 2023, industrial rents on current leases have been rising, according to Yardi Matrix’s most recent report. Average sale prices have been on a steady incline and are higher compared to other property classes.

The Distinction among Class A, B, and C Industrial Real Estate:

Class A – This category represents the highest quality and typically the most expensive type of industrial property. These properties often feature multiple loading docks, an advantageous location near highways, generous ceiling heights ranging from 32 to 40 feet, and ample parking facilities. Generally, Class A industrial properties have been constructed within the last seven to ten years, showcasing modern design and architecture. The primary tenants occupying Class A industrial spaces are larger corporate entities like Amazon and Target.

Class B – These buildings are relatively older, with lower ceilings and fewer truck docks. The brickwork and windows may exhibit signs of aging, and the loading docks may lack efficiency compared to newer counterparts. Local, smaller tenants are commonly found in Class B industrial properties.

Class C – These structures are typically over 20 years old and require renovation. They often have limited on-site parking and are situated in tertiary markets farther away from highways and major cities. Class C industrial buildings generally have lower ceiling heights and tend to attract tenants involved in light manufacturing rather than distribution. These properties often lack building amenities and may have outdated infrastructure and technology.

Benefits of Investing in Industrial Real Estate

Several profitable benefits come with investing in industrial real estate:

Higher Yields – Industrial real estate derives its value from the available square footage for rent, resulting in higher rental income. With fixed annual price increases often tied to the Consumer Price Index (CPI), yields typically reach around 8%. Although this may appear less enticing compared to other sectors like retail, it also means that industrial properties are less susceptible to market fluctuations, making them an attractive option for risk-averse investors.

Net Leases – One of the advantages of industrial real estate is that most leases are structured as net leases. This means tenants sign longer lease agreements and take responsibility for major expenses, including maintenance and repairs. Depending on the tenant, these leases can range from 3 to 10 years or even longer. Rent increases are often incorporated into these leases, making it a hands-off investment that generates passive income. Industrial properties also experience lower turnover rates than other commercial investment properties, resulting in significant cost savings.

Flexibility – Industrial properties offer various shapes, sizes, and building requirement options. While certain industries necessitate specific layouts and equipment connections, many types of industrial properties can be easily reconfigured to accommodate various tenants. The interior build-out required for industrial real estate is typically less extensive. Consequently, when one tenant vacates a space, another tenant can swiftly move in without requiring significant updates to the building. This flexibility enhances the potential for continuous rental income and minimizes vacancy periods.

Industry Updates

Supply constraints in 2024 could lead to increased demand and lower vacancy rates, particularly in desirable locations. Some markets may experience temporary vacancies due to ongoing construction, while overall vacancy rates remain lower than in 2019.

Over the last decade, the semiconductor sector has seen an unparalleled boom in manufacturing expenditure, with an average annual capex growth of 30 percent, according to GlobeSt. While PC production demand declined after the pandemic, there is a rising demand for semiconductors in artificial intelligence applications. With intense global competition and the growing demand for AI chips, the semiconductor industry is expected to grow and thrive. This will have a major influence on the CRE industrial sector as a whole, as the semiconductor industry is set to drive technological and innovative advancements for years to come.