Industrial real estate has been a high performer over the past 20 years, and more so over the last several years. The average annual total return for industrial properties is 10.6% over 20 years, compared with the average return of 10.2% across all property types, according to the Over the last five years, average annual rate of returns have been 12.8%-The National Council of Real Estate Investment Fiduciaries (NCREIF)
If you’re like many investors, the phrase “industrial property” conjures up images of imposing steel structures rusting away in the middle of nowhere.
I have to admit, when I first started looking into this asset class, I thought the same thing. I said to myself,
“Oh great, we get to manufacture paint and then watch it dry…” “WOW! Concrete and steel- so hip!”
Then, I did a little research into the NUMBERS around this sector and… I was blown away! As you can see in the chart above, industrial, especially the more modern “flexible” industrial, is a solid performer, year after year.
Face it, when you’ve got the performance data for industrial staring you right in the eye, can you really afford to be a commercial investing snob?
So, at this point, you might be asking yourself, “What are Anna and Neal up to now?”
You probably know that we just finished a capital raise for a fast-paced, high-tech, “healthy housing” project in Houston that was off-the-charts sexy and intriguing. An industrial project might seem like kind of a letdown for some of you.
But, as usual for Grocapitus, we are up to our necks in data, numbers, and all kinds of research. And, that research pointed to the one asset class we’ve never considered before: flexible industrial space.
Some of you might not know that industrial flex spaces are hybrids between warehouses and office spaces. They are the buildings you often find in suburban areas, hosting tenants ranging from “last mile” distribution centers, to small manufacturers, to tech startups. These are not those dilapidated eyesores you might run across in the Rust Belt.
These overlooked little gems have incredible investment potential, especially in the wake of COVID-19 and the re-thinking of supply chain protocols.
Recently, our friends at Marcus and Millichap published a special report outlining several reasons why investors should consider adding flexible industrial space to their portfolios.
Some of the takeaways from that report:
Flex industrial supports ESSENTIAL businesses and online retailers. It is ideally positioned to weather pandemics and other crises.
Flex spaces are incredibly versatile and are used for a variety of businesses, including manufacturing, distribution centers, office space, and storage.
They aren’t subject to the eviction moratoriums currently imposed by many states.
Online retailing has taken off, and online retailers are gobbling up flex space at a fantastic pace.
I have identified other reasons I find flexible industrial so appealing as a profitable asset class.
NOI
The net operating income for Industrial properties is generally much simpler to maximize using various levers, including cost reduction. (we’re experts at this, by the way!) Additionally, while the average rent per square foot for industrial is less than other asset types, these properties range from 50,000-500,00 square feet, which means you can generate much top-line revenue!
Triple Net Lease
(our new project has this) Imagine being able to shift insurance costs, building maintenance, and property taxes to the TENANT. Many industrial properties have triple net leases that allow you to do just that. Triple nets increase the potential for lower costs and an even higher NOI. (yippee!)
Federal and state incentives
Many investors are unaware of federal, state, and local incentives created to attract both industrial developers and tenants. For example, the Foreign Trade Zone (FTZ) program allows businesses located inside the zone to store commercial goods without having to pay customs duties. There are also things such as expedited permitting, tax credits, and economic stimulus programs designed to attract companies.
I look forward to helping you discover the amazing potential of this COVID-resistant asset class.
Neal
Founder and CEO, Grocapitus and Multifamily University