3 Reasons Why Industrial Investment Properties Lead the Pack

Historically, many commercial real estate investors have viewed industrial investments as an afterthought - something that exists but that doesn’t warrant real consideration. 

In a noticeable shift, industrial properties have recently emerged as a central pillar in many commercial portfolios, both for their investment and development potential.  

In this article, I’ll cover the major reasons why industrial investments have taken this leading position.  Specifically, I’ll dive into each of the following: 

• Reason 1: Strong Demand Drivers

• Reason 2: Warehouse Markets are Booming

• Reason 3: Warehouse Owners Reap Rewards

• Final Industrial Thoughts for Investors

Reason 1: Strong Demand Drivers

From a macroeconomic perspective, US – and global – strength in demand drivers translates directly into industrial property success. 

First, a global transition to e-commerce has had a seismic effect on the logistics of getting goods to consumers.  Consumers used to frequent central business district retail shops, and the typically high rents in these areas prevented massive stockpiling of goods by retailers.  Now, as consumers purchase online, e-commerce companies more frequently choose to lease large warehouse spaces to meet these customer demands – without paying central business district prices.

Next, demand for warehouse space also corresponds to GDP growth, in general.  Even ignoring the major impact e-commerce has played, when an economy grows like the global economy has following the Great Recession, the associated need for warehousing grows with it.  More specifically, this GDP growth tends to align with housing construction and new housing starts.  And, these builders need warehouse space to store their construction materials. 

Finally, global trade liberalization policies – and the increase of import/export-based trade they’ve fostered – play a major role in warehouse demand.  As Americans both send more goods overseas and purchase more from other countries, more of the products we buy and sell spend some time in a warehouse during their journeys to consumers. 

These factors all have contributed to strong tenant demand for warehouses, and none of them appear to be in major danger of reversing course. 

Feel free to drop us a note if you need help analyzing industrial demand trends in your market.  This analysis can seem challenging, and we’re happy to help!

Reason 2: Warehouse Markets are Booming

If you talk with commercial real estate brokers focused on warehouse space, they’ll likely stress the limited supply of these sorts of spaces.  While tenant demand for warehouse space has grown significantly as a result of the factors outlined in the above section, construction of new warehouse properties has not kept pace with this demand.  

The result?

Tenants cannot be too discriminating in their warehouse demands, often instead needing to accept available spaces simply because they’re available.  Furthermore, future best-in-class warehouses will need to be A) accommodated to support automation, and B) moved closer to residential areas to facilitate next-day delivery. 

But, these needs have not been met in most markets, which means that nearly all warehouse properties – regardless of quality – are currently benefitting from demand surges.  In other words, leasing has remained strong while construction has lagged, leading to soaring warehouse occupancy levels in this commercial sector. 

Reason 3: Warehouse Owners Reap Rewards

All of the above have tremendously benefitted the investors who own warehouse spaces.  As demand and occupancy levels increase, prices and overall returns have followed, leading to warehouse outperformance of other commercial property sectors.   

These positive results will surely influence future deal analysis, leading to more and more investors entering the warehouse space.  However, this increase in supply is unlikely to outpace demand, preventing any major hits to rents and occupancy levels – and ensuring continued high returns for investors. 

Commercial real estate professionals can help you identify warehouse investment opportunities for your market and unique situation.  Need help connecting with reliable ones? Drop us a note!

Final Industrial Thoughts for Investors 

Multifamily properties recovered fairly quickly after the Great Recession, and current record prices, rents and occupancy in many markets make major future gains unlikely. 

With office space – especially in the COVID era – most companies seem more concerned with cutting operating costs and creating flexible work regimes than leasing prime office space, leaving vacancies stubbornly high. 

I touched on retail above, but the seismic shift to e-commerce has combined with prior overbuilding to hit this sector particularly hard.  Certain high-end retail centers remain successful, but these stories are more and more frequently the exception, not the rule, for property success. 

While commercial property types certainly perform cyclically, it is clear that the current environment best supports the industrial sector. 

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We recognize that, even after outlining the above information, breaking into industrial property investments can seem daunting.

That’s why we’re here to help.  The Pocket Broker team lives and breathes commercial real estate, so drop us a note to see how we can help you achieve your unique objectives!