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Real estate investors need to be open about their options, and investing in industrial real estate must be one of them. Industrial real estate in this case can be defined broadly as any property that either has a storage facility, like a warehouse, a distribution center, or a flex space, or can accommodate any number of industrial activities, such as a building that can be converted into a production area or a manufacturing plant. In this way, all opportunities are explored, potentially increasing the chances of sealing that one money-making deal that can lead to more of such deals.
But like all-things real estate, investing in industrial real estate is far from an exact science. It has pros, yes, and these can no doubt entice you to try investing in industrial real estate. At the same time, it also has cons, and these can possibly make you second guess about diving into this branch of property selling.
With that being said, here are the pros and cons of investing in industrial real estate. Real estate investors can peruse this list to guide them better as to whether or not they should try investing in industrial real estate themselves.
Pros of Investing in Industrial Real Estate
The following are the pros or advantages if one is to invest in industrial real estate:
1. Industrial Real Estate Is in a Golden Era
Deloitte, in a study on the future of industrial real estate, notes that this sector of real estate is in its Golden Era, having made its way there starting in 2013. Since then, year-on-year growth in industrial real estate has been mostly positive, with availability rates declining steadily. In addition, demand in industrial real estate is forecast to rise by 14.8 billion square feet by 2023, translating to an increase in demand of roughly 850 million square feet in just four years (from 2019 to 2023). This demand is expected to be driven by unprecedented growth in eCommerce, which has only grown over the last two years due to the pandemic. Needless to say, the iron is still hot, and now is a good time to strike it.
2. Investing in Industrial Real Estate Ensures Diversity
Just as stock investors are advised to diversify when trading stocks, so should real estate investors when investing in real estate. One of the best ways to diversify in this case is to invest in industrial real estate, which in itself gives you a multitude of options to explore to begin with. Consider: Given the many industrial activities that a single industrial property can be used for, a real estate investor investing in industrial real estate will already have a diverse clientele—manufacturing companies, retails stores, logistics businesses, and so on. With more potential clients, the chances of getting a deal done increase considerably.
3. Higher Income for Longer Periods
The bottom line in investing is getting a good return on investment. Investing in industrial real estate offers one of the best opportunities to do so for two reasons. First, rental rates of industrial real estate properties are much higher compared to residential properties. Second, lessees are more likely to not only sign up for longer, but also to renew their terms since moving elsewhere will most probably be costly and logistically challenging. Between these two reasons, the earning potential of investing in industrial real estate is certainly more enticing.
The Cons of Investing in Industrial Real Estate
The following, meanwhile, are some of the drawbacks of dabbling in industrial real estate:
1. Industrial Real Estate Is Set for a Market Correction
While industrial real estate is in a golden age, it should be noted that every golden age plateaus. A distinct possibility, in particular, is demand growing so high that it outpaces industrial real estate spaces, to the point that the discrepancy results in skyrocketing rental prices. When this happens, the demand is most likely to shift to a different area and cause a plateau in the demand for industrial real estate.
2. Industrial Property Is High Maintenance
Unlike residential properties, maintaining industrial ones is oftentimes a more challenging and highly specialized task. More often, this task will require hiring professionals who can best handle maintenance and repair issues that may arise whether the property is unoccupied or not. As such, a considerable investment in time is generally necessary when one chooses to invest in industrial real estate. That’s not to mention the attendant costs with hiring professional help to make sure that the property stays in excellent condition.
3. Longer Holdover
Industrial properties are often remodeled to fit a tenant’s business needs, and oftentimes the remodeling can be extensive. So, in case that tenant does not renew its contract and moves elsewhere, holdover is likely to be longer as opposed to residential properties. That’s because it will take a while to revert the property to its original state and undo the previous tenant’s alterations. Between this time and the time it will take to actually get a client interested in said space, the industrial real estate investor is looking at potentially several months without a tenant, which also means several months without income.
Investing in industrial real estate is a big decision, and it can either be boon or bane for the investor that tries it out. Then again, that is true for real estate in general, where the rewards are as big as the risks. This is why every decision in this industry—like whether or not one should invest in industrial real estate—must be made only after a careful evaluation of available information, like the guide above.
The article is a guest post. The opinions and suggestions contained in this article are solely of the author and doesn’t necessarily reflect the stance of Baguio Herald Express management and staff.