Investing in Industrial Real Estate – Evaluating the Opportunities & Risks

The stock of industrial real estate properties in the U.S. increased by about 2.8% between 2022 and 2023, growing at the fastest pace in more than three decades. Moreover, developers are currently constructing more than 500 million square feet of industrial properties.

These and other trends in industrial real estate indicate the market’s steady growth and point to lots of potential opportunities for investors. However, investing in this niche also comes with a few challenges and risks you should consider before diving in. Here is a brief overview of the opportunities and risks of investing in industrial real estate.

Pros of Investing in Industrial Real Estate

Investing in industrial real estate is potentially lucrative and comes with many benefits, including the following:

·         High Rental Income

Commercial properties are typically huge, and some are specialized and customized for various special uses. Consequently, rental prices are quite high, notably higher than residential and commercial properties, although they may vary depending on various factors. Overall, the rental income and long-term ROI from industrial properties are very attractive.

·         A Growing Market

The industrial real estate property market is growing at the fastest pace in more than 30 years. The niche’s growth has many driving forces, including the growth of e-commerce businesses, advancements in automation, and the growing demand for delivery services. Moreover, there is an uptick in demand for manufacturing spaces to sustain the growing population and urbanization.

·         Sustainable Demand

Industrial property investments are more stable than other real estate property niches. Notably, many industrial properties are always in use, making them resilient against recession, pandemics, and other negative impacts on the economy.

·         Long-Term Leases

Moving from one industrial property to another can be cumbersome. To this end, most tenants prefer finding an ideal location and holding on to it for as long as it remains convenient, usually several decades. To this end, industrial property leases are long-term, guaranteeing you a stable rental income flow for many years. It is also worth noting that working with one tenant for long periods saves money on turnover costs and can yield some convenient personal benefits.

·         Low Maintenance & Minimal Outgoings

Most industrial properties require little maintenance because the spaces are usually open and simple. Moreover, most industrial contracts are based on net leases, transferring most maintenance responsibilities and costs to the tenant. As such, you save money, time, and other resources that you would spend on maintenance responsibilities and costs.

Cons of Investing in Industrial Real Estate

While industrial real estate offers many opportunities for investors, it also poses the following risks and challenges:

·         High Interest Rates on Bank Loans

Industrial properties require a large capital, necessitating applying for substantial loan amounts. Moreover, industrial properties carry more risks than other real estate niches from most lenders’ point of view.

To this end, loans for industrial properties come with high interest rates reaching up to 30%. They also have strict terms and conditions that can make qualifying for an industrial property loan can be challenging.

·         Risk of Vacancy

Industrial real estate is a somewhat limited niche market despite having many potential uses. To this end, the property can remain vacant for long periods if the space doesn’t attract tenants. As such, you can lose thousands or millions in unrealized rental income. This is not ideal, as most investors prefer real estate assets that can generate a steady income.

·         Risk of Going Obsolete

Industrial real estate is a highly dynamic niche that regularly undergoes notable changes and new developments. To this end, industrial property that is not flexible or versatile enough runs the risk of going obsolete, essentially sinking your investment.

For example, new machinery may be too heavy for the floor, while the roof may be too low to accommodate new fixtures. Moreover, changes in the surrounding location, such as the development of new residential properties, can also make industrial properties obsolete.

·         Complex Laws & Logistics

Developing a reliable investment strategy for industrial properties requires a comprehensive business plan. Moreover, complex laws regulate the development of industrial properties. To this end, investing in this niche can be complicated and usually necessitates hiring experts in various fields.

Conclusion

Investing in industrial real estate has many benefits, including high rental incomes, long-term leases, and low maintenance costs and responsibilities. Moreover, the industrial real estate niche is growing, providing more opportunities for investors. However, investing in this niche also has a few challenges. Overall, the benefits of investing in industrial real estate outweigh the risks.