Industrial Real Estate — The Basics
Industrial real estate is considered one of the four major commercial real estate asset classes, along with office, retail, and multifamily. Heading into 2025, and with interest rates falling, our position is that industrial real estate investing is one of the most appealing asset classes. For self-directed individual investors, industrial real estate investing is an exciting prospect for those ready to diversify beyond residential assets.
While industrial assets may not have the curb appeal of other property types, demand for industrial investments has surged over the past few years as the sector transforms to accommodate high-growth industries. The proliferation of e-commerce, internet technology companies, and manufacturing is demanding new industrial spaces to accommodate their growing presence. In this article, we will dive into the fundamentals of the industrial sector and highlight what we see as the specific demand drivers in the current market cycle.
Industrial Real Estate Investing Definition
Industrial real estate investing is the process of acquiring, managing, and exiting industrial real estate assets in the pursuit of investment returns. In practice, industrial real estate investing typically entails developing and maintaining industrial properties to the specifications and needs of tenants. The use cases and tenant pool for industrial property has evolved with the advent of e-commerce and expansion of international trade. Industrial real estate may be of interest for both institutions and individual passive investors.
An example of an industrial real estate investment on the EquityMultiple platform.
Why Invest in Industrial Real Estate?
Industrial real estate offers some unique potential benefits versus other commercial real estate asset classes.
- Stable Cash Flows: Industrial leases, often spanning several years, offer investors steady income streams. A 2020 CBRE report highlighted industrial properties’ high occupancy rates, around 95% in major markets, underscoring their cash flow stability.
- Resilience to Economic Fluctuations: The sector’s resilience was evident during the 2008 financial crisis, demonstrating less volatility compared to retail and office sectors. This stability is partly due to the essential nature of the services these properties support.
- Growth Potential: The e-commerce boom requires an additional 1 billion square feet of industrial space by 2025, according to JLL. Properties near urban centers, facilitating efficient distribution, are particularly poised for appreciation.
Key Considerations for Investors
Investors must navigate market dynamics, property specifics, and lease structures. For instance, properties with modern features like high ceilings and energy-efficient systems are more attractive to tenants. Additionally, understanding the nuances of lease agreements, from triple net to gross leases, is crucial for assessing investment potential.
For a number of reasons, industrial real estate investing is more complex and harder to access than multifamily investing. EquityMultiple offers fractional, passive opportunities in the industrial sector, which can give self-directed individuals a pathway to diversifying into this asset class.
Industrial Real Estate — The Latest Update
Broad demand drivers insulated industrial real estate from some of the turmoil affecting other asset classes since mid-2022 (when the Fed began raising interest rates). Despite rising rates, consumer confidence and hiring remained relatively strong. The consumer base of the United States continues to spread across a broader set of metros, and e-commerce continues to claim market share. Both trends, accelerated by the COVID-19 pandemic, should create upward demand pressure for industrial real estate for the foreseeable future. In a falling rate cycle, this general tailwind may only be strengthened.
In September of 2024, the Fed elected to cut interest rates for the first time this cycle. Falling interest rates can benefit the economy in a number of ways, and generally benefits all real estate asset classes. That said, industrial real estate may be uniquely well positioned: much of the activity that takes place in industrial real estate is capital-intensive, and depends highly on new investment. Hence, falling rates should stimulate activity among industrial tenants, putting upward pressure on demand for industrial real estate space.
The continued growth of e-commerce creates an insulated upward demand driver for industrial real estate investments. While shopping is steadily moving online, it still only accounts for around 25% of all purchases. There is plenty of room to run. The industrial sector also benefits from a double-edged demand driver in terms of foreign trade and industrial policy. Recently, the political climate has trended toward protectionism and less enthusiasm for foreign trade. The CHIPS Act and Inflation Reduction Act both established incentives for domestic manufacturers in crucial, growing industries. These industries will need space to operate. If this trend reverses course, increased foreign trade activity could necessitate greater logistics and warehousing space for import/export activity and processing.
For these and other reasons, industrial real estate is a focus area for EquityMultiple and our investment origination analysts.
GreenStreet Advisors — one of the leading research institutions in commercial real estate —remains bullish on the asset class:
Tenant demand remains tempered, but vacancy rates are expected to peak soon as supply completions decelerate.
-GreenStreet Advisors, 10/16/24
Digging in a bit deeper on this GreenStreet quote: the supply pipeline accelerated up until the peak of the pre-rate rise cycle. Heading into 2025, these new completions (new supply in the market) are slowing. With lower rates hopefully driving more activity among industrial tenants, the supply/demand picture may turn more positive for investors.
The macro picture is important. Keep in mind, however, that different markets across the U.S. may present different opportunities across asset classes, like industrial. EquityMultiple maintains a proprietary scoring model for each sector, and markets within those sectors. In industrial real estate investing, for example, the trend is “onshoring” favoring certain markets, such as those in the Midwest and Sun Belt.
Key Takehome:
Industrial real estate investing is all about scale, and can be complex. EquityMultiple allows you to invest passively and fractionally in professionally managed, vetted real estate assets.
Types of Industrial Real Estate
Typically, industrial real estate is segmented into three categories – warehouse and distribution, manufacturing, and flex industrial.
Warehouses
Warehouses play a critical role in the modern industrial supply chain. These facilities support storage and distribution activities, which demand large space, elevated ceiling height, and loading capacities. These facilities are typically located in industrial parks – areas zoned and planned for the purpose of industrial development. In a race to deliver goods to the end consumer faster and more reliably, tenants are looking for areas with the significant logistic advantage that minimize the facility’s mileage between both customers and materials. Compared to other industrial facilities, large industrial warehouses and distribution facilities typically command the lowest per square foot asking rent.
Manufacturing
Manufacturing industrial properties – which host assembling and casting space, smaller warehousing, and some office space – is the second largest category of industrial property. This type of industrial property may be less demanding than warehouse and distribution in terms of square footage but has specific requirements regarding infrastructural support. Properties may host extensive power, specialized machinery, pressurized water, and other utility features to fulfill a varied set of tenant demands. Scalability and flexibility are crucial to manufacturing facilities.
To allow a manufacturing facility to optimize its operations and productions, these sites typically have accommodating storage space, laboratories for research and development, and offices for administrative (payroll, billing, collections, and marketing). Some states provide qualified manufacturers with property tax deduction benefits on properties that principally conduct manufacturing, processing, and other industrial activities. In the state of New York, for example, qualified manufacturers and manufacturing properties are entitled to receive a 20% deduction on eligible real property taxes.
Flex Space
Flex space, the third type of industrial asset, is a hybrid between warehouse and office space. This property is typically located in suburban areas with abundant parking spaces for commuters. Hosting an array of tenants from small operation manufacturers to research and development (R&D) departments of corporations, flex buildings can support numerous operating activities. Flex spaces were originally designed for manufacturers that needed both office and manufacturing space in one building, but the versatility of industrial flex space is now attracting new tenants like tech start-ups. Offering more amenities than other industrial buildings, these flex spaces feature superior exterior and landscaping design and include functional build-outs to satisfy office workers while accommodating industrial activities. As a result, flex space is often ideal for manufacturing, distribution, and storage but can also easily convert to a regular office.
A major benefit for the tenant is the ability to configure the flex space at will and adjust the proportion of office and warehouse according to the business’s changing needs. As an alternative to the traditional office, the leasing cost of a flex space industrial property is significantly lower than average leasing cost of class C office space in many U.S. real estate markets.
As businesses continue to outsource to third-party logistics companies, particularly for last-mile services, there is an increasing lack of available industrial real estate near highly populated areas, as well as workforce challenges… The industrial real estate sector has been a compelling asset class during the COVID-19 pandemic with the past 2 years marking the best period in history for industrial fundamentals, as national market rents grew over 40% cumulatively or in excess of the past 7 years combined.
— EquityMultiple 2024 Outlook Whitepaper
Considerations for Industrial Real Estate Investing
NOI & Cap Rates
Real estate value is mainly driven by two factors – net operating income and capitalization rate (or “cap rate”). For industrial properties, operating income can be maximized by various levers.
Although the average per-square-foot rent is lower in comparison to other asset types, with square footage ranging anywhere from 50,000 to above 500,000, the sheer size of industrial property can magnify the collectible rent, generating considerable top-line revenue.
Industrial property operators can also maximize net operating income through cost reduction. Unlike other commercial properties, industrial assets do not have common areas that require periodic maintenance and ongoing improvements. Industrial property owners often sign a triple net lease (NNN) with the tenant, shifting payment responsibilities over building maintenance, insurance, and property taxes to the tenant. Thus, the property will have a lower cost and potentially have an even higher net operating income.
Longer Lease Terms
Besides the NNN feature, industrial lease terms are typically longer than other asset classes, ranging between three to fifteen years, with rent escalation on an annual basis. This lease feature makes industrial property ideal for real estate investors seeking longer investment horizons. In contrast to asset classes such as multifamily, where the lease term and tenant quality are in flux, industrial properties might be viewed more favorably for investors looking to lock in their capital longer term while hedging inflation risk.
Quick Construction
Investors and lenders are often attracted to speculative development due to not only strong underlying fundamentals but also due to quick delivery times. Industrial buildings can have completion timelines as quick as eight to twelve months depending on certain variables – generally a shorter development time frame than with other real estate property types.
Incentive Programs
Federal and state legislatures often use incentive programs to attract industrial tenants and developers. Local governing bodies often introduce business-friendly incentives, such as expedited permitting, tax abatements, tax credits and other stimulus programs to attract companies. One such program is the Foreign Trade Zone (FTZ) program. FTZs are governed and administered by the Customs Border Protection (CBP). FTZs allow businesses located within an FTZ to store commercial products without paying customs duties and help reduce the administrative burden of customs entry procedures. Warehouses within FTZ’s that store international trade merchandise can benefit from potential duty-deferral or exemption. FTZ-located properties are also eligible for reductions on property taxes.
Investing in Industrial Real Estate in 2024 (and beyond)
While the revenue per available square foot projections have come down some from record highs, Green Street and others still forecast stable growth in the sector. Critically, the supply pipeline has thinned considerably, creating less competition for operators and properties in the coming years.
With these dynamics, we can hope that rent growth in the asset class can resume the trajectory of recent years.
There is a lot to know about industrial real estate investing. While it can offer a unique return profile, few individual investors have the capital, time, and knowledge to successfully execute within this asset class. That’s where passive real estate investing options come into play. EquityMultiple’s dedicated Investor Relations Team is standing by to answer your questions and help you find an industrial real estate investment for your portfolio.
What’s Driving Industrial Demand?
Continued E-commerce Growth
An important leading economic indicator that drives demand in this particular asset class is consumer spending. Global e-commerce sales increased during the COVID-19 pandemic, rising from 15% of total retail sales in 2019 to 21% in 2021. It now sits at an estimated 22% of sales per Morgan Stanley.4
E-commerce is expected to grow to a quarter (or more) of all shopping in the U.S. by 2027. We expect this trend will continue (albeit at a potentially slower pace), as consumers are now well-accustomed to the convenience of purchasing goods online, and even smaller vendors increasingly must try to compete with Amazon’s speed of delivery. Companies will then naturally have a greater need for warehouses and fulfillment centers to support this growth.
Acceleration of the fundamental sector drivers, particularly the maturation of e-commerce post-covid, has been striking. In 2023, nominal growth in e-commerce outpaced brick & mortar by 7.5% to 2.7%, respectively. With e-commerce generally requiring 3x the footprint, this significant demand driver is projected to average ~25% of net absorption over the next 5 years.
— Charles De Andrade, CAIA | Associate Director, EM Investment Partners
Ongoing Supply Chain and Geopolitical Volatility
You might think that supply chain disruptions would have a negative impact on the industrial asset class. In reality, however, companies tend to hold a larger supply of goods onsite due to shipping delays – a potential benefit for industrial property owners.
To meet quick delivery demands and minimize transportation costs, we think the need for warehouse space should increase accordingly. Manufacturing industrial properties may also see a similar uptick in demand, as more companies potentially regionalize their operations to avoid further logistical headaches.1
Geopolitical tensions continue to mount. Although this is not a positive trend, the current international relations climate can benefit industrial operators. Onshoring of supply chains and manufacturing could drive up demand for industrial space as multinationals consolidate logistics, warehousing, and operations to the U.S.
Potential Risks with Industrial Real Estate
Like all commercial real estate sectors, rising interest rates create a higher cost of capital and headwinds to profitable investments. The silver lining for industrial real estate: leases tend to be longer, tenants more specialized, and hence rental revenue can be insulated somewhat from volatility.
Regardless, even if the pace of e-commerce growth tapers off and industrial tenants need to scale their operations back, we believe the sector is well-positioned to weather the challenges. In periods of high inflation, the industrial asset class has historically posted gains in value (see below for an effect of a 1% increase in inflation on property value from 1979-2020).
It’s worth reiterating: existing property owners may be at an advantage, as supply is still limited in many high-growth urban areas. Despite economic uncertainty, we believe the industrial sector will continue to demonstrate resilience.
Key takeaways:
- We believe the industrial market is likely to continue benefiting from some of the strongest-performing areas of the U.S. economy through 2024and beyond.
- Based on current and projected performance, EquityMultiple is committed to pursuing investments in the industrial sector.
- We expect to offer investors with what we feel will be significant upside opportunities into 2024 and beyond.
Industrial real estate investing is complex, and out of reach for most individual investors on their own. EquityMultiple provides you access to vetted industrial real estate investments through a streamlined platform at a low minimum.
Industrial Real Estate Investing — The Bottom Line
If you have not already invested in the industrial real estate sector, it may be worth considering as part of your 2024 investment strategy. Note: EquityMultiple believes diversification across asset classes can help reduce risk in your investment portfolio. That said, while we believe industrial real estate is likely a strong bet given current market fundamentals, we encourage you to do your own due diligence prior to investing.
Want to learn more about industrial real estate investing opportunities? Schedule a call with our Investor Relations team today.
FAQs on Industrial Real Estate Investing
Q: What makes industrial real estate a good investment?
A: Industrial real estate offers several advantages, including higher average returns compared to other property types, long-term leases that provide stable income, and growing demand driven by e-commerce and logistics. The sector’s resilience during economic downturns, as seen during the COVID-19 pandemic, further underscores its investment appeal.
Q: What are the risks associated with industrial real estate investing?
A: Like any investment, industrial real estate comes with risks, such as market fluctuations affecting demand, potential environmental issues with manufacturing sites, and the need for significant capital for property improvements or compliance with regulations. However, thorough due diligence and strategic location selection can mitigate these risks.
Q: How can I start investing in industrial real estate?
A: Accredited investors can start by researching platforms that specialize in commercial real estate investments, like EquityMultiple. These platforms provide access to curated opportunities, allowing investors to diversify their portfolios with industrial properties. It’s also advisable to consult with real estate professionals who have experience in the industrial sector.
Q: What should I look for in an industrial real estate investment?
A: Key factors to consider include the property’s location and accessibility, the quality and solvency of tenants, potential for appreciation, and alignment with current market trends, such as the growth of e-commerce and logistics. Additionally, investors should evaluate the property’s physical condition, potential environmental liabilities, and the flexibility of the space to accommodate various tenants.
Q: Can industrial real estate investments hedge against inflation?
A: Yes, industrial real estate can serve as an inflation hedge. Long-term leases often include rent escalations tied to inflation, and the tangible nature of real estate assets can protect against the eroding value of money during inflationary periods. Moreover, the growing demand for industrial spaces, driven by e-commerce and global trade, can lead to rental income growth that outpaces inflation.
This enhanced exploration into industrial real estate investing underscores the sector’s potential for robust returns, driven by strategic location selection, adaptability to market trends, and the burgeoning growth of e-commerce. By delving deeper into the nuances of industrial real estate, investors can better position themselves to capitalize on this often-overlooked, yet increasingly vital, component of the real estate market.
Q: How does e-commerce impact the sector?
A: It increases demand for warehouses and distribution centers, especially near urban areas.
Q: What trends should investors watch?
A: The demand for advanced, sustainable properties and the impact of global supply chain strategies.
1 Source: JLL United States Industrial Outlook, August 15, 2022
2 Source: Cushman & Wakefield Q2 2022 U.S. Industrial Marketbeat, July 11, 2022
3 Source: CBRE, Construction Picks Up as Demand Continues Amid Limited Availability, July 29, 2022
4 Source: Morgan Stanley Global Ecommerce Growth Forecast, June 14, 2022