Selecting the Best Industrial Investment in 2023
Looking to get into industrial real estate investment? Here’s what you should consider.
Commercial real estate investors and analysts have been quick to highlight the gains in the industrial sector in the past few years. And it’s certainly true that investment volume has surged: Yardi Matrix’s February report on the asset class showed that $3.6 billion in industrial deals closed in January 2022 alone, following a staggering, record-high $71 billion in sales during 2021.
But how much longer will industrial real estate stay in flight? Does it make sense to make your first investment in this high-growth sector today?
Still Gaining Speed
It’s important to note that industrial real estate had been growing increasingly attractive to investors for years. While the pandemic propelled the sector forward — particularly with the spectacular blossom of e-commerce — most analysts acknowledge that this growth was set to occur anyway. Critically, online retail has plenty of room still to grow. A Statista report on global retail sales in 2021 projected that an estimated 19.6% of retail transactions occurred online that year. While this is a major jump from the 13.8% reported only two years earlier, online sales are expected to only grow further, though growth is likely to be a bit more muted as restrictions fade away in many states. But industrial stands to gain even when shoppers head to the stores.
A February report from CommercialEdge show that rents in the industrial sector have, across the country’s top 30 markets, increased by an average of 4% for the year ending in January. And vacancy continues to trend downward, highlighting the sustained rise in demand for space.
Alongside these market fundamentals, industrial assets have gained tremendous value — and these gains are likely to carry on, especially as supply-chain bottlenecks and online shopping trends persist. Sale prices on a per-square-foot basis jumped nearly 30% between 2020 and 2021. This doesn’t necessarily mean industrial pricing is out of reach for all but the wealthiest of investors, however, as gains have been largest in new, Class A facilities in supply-constrained coastal markets. Plenty of opportunities remain in Class B and C assets — while their value continues to climb, it’s important to highlight what sets properties apart. What sets a good industrial investment apart from a bad one?
Location Is Key
It’s not enough to have a modern facility, you also need a location that offers advantages in terms of what’s nearby. If you’re an experienced commercial real estate investor, this may seem self evident, but industrial assets have a very different set of location criteria that you may be less familiar with. Being close to a highway is ideal, for example, but what is the condition of the roads leading to that highway? Also, are there any infrastructural improvements planned or underway in the area you’re looking at? What about rail hubs or a seaport? All of these things — even if they’re not in place today — can create significant value.
It’s not just about roads and infrastructure, though. The right industrial property, even far from a highway, can have significant value. Take the recent upswing in demand for last-mile distribution centers, for example. Transportation tends to be more expensive than storage, so a smaller asset within a major population center could offer a significant investment upside.
Clear heights are one of the most important attributes of an industrial facility. Most properties built before the 1980s won’t have a clear height of above 20 feet, but modern distribution hubs are rising higher and higher — to 40 feet and even beyond. The higher your building’s ceiling is, the more cubic footage it will have — meaning more storage potential.
While an office or retail investor may be concerned with square footage, cubic footage is just as — if not more — important. Consider a 20,000-square-foot building with 20-foot clear heights, or potentially 400,000 cubic feet. A structure with the same footprint but 32-foot clear heights could have as much as 720,000 cubic feet, or 80% more storage space. Keep in mind that a building’s clear height is really not something you can change — so it’s best to make sure you fully understand the capacity restrictions that come with your investment’s clear height.
A lot of internal characteristics of a property are very important to review. While it’s a bit too much for us to cover in this piece, check out our related educational articles to get an idea of the full array of considerations. But, in brief, some questions to ask yourself about an asset include:
How are the loading doors configured, and how many do you have?
Are the docks set up with levelers and bumpers to ensure easy loading operations?
What’s the column spacing within the property, and are speed bays present?
How much office space is built out within the facility? Can it be expanded?
Most newer properties built in the past 20 years generally will hit most tenants’ requirements. That said, it’s essential to understand your market’s specific tenant composition and any needs that may need to be met in the future.
Assessing a building’s interior is also the first step in making improvements that benefit both you, the investor, as well as any future tenants. Making meaningful upgrades to an older property by replacing HVAC systems or adding LED lighting could make a significant difference in both an asset’s operating costs and its marketability.
Don’t Forget the Outside
There’s a lot to consider on an industrial investment’s exterior, too. How is the property’s truck court configured? Can multiple trucks maneuver simultaneously, or could congestion be a problem? Is there sufficient parking, both for cars and for trailers? Is the exterior area secured with a fence and gated access?
The answers to these questions can help inform what’s possible — and what’s not — particularly given any constraints in terms of available land and nearby buildings. If parking may not be sufficient, is there space to add more later on? Could the structure be fitted with solar panels to reduce electricity costs? There are many different factors to consider on the exterior, and it is wise to think these options through, even if upgrades may be years down the road.
What are the key factors to consider when selecting an industrial property investment in 2023?
When selecting an industrial property investment in 2023, key factors to consider include the amount of new construction in the area, potential competitors, and the type of property. According to a survey of investors, industrial real estate is the top investment pick for the year, followed by multifamily. Investors are also interested in older buildings and facilities in secondary or tertiary markets, as well as niche sectors like self storage. Industrial Property Loans provides more information on asset classes. Additionally, Commercial Real Estate Loans provides a beginner's guide to self storage investing.
What are the advantages and disadvantages of investing in industrial real estate in 2023?
Investing in industrial real estate in 2023 has several advantages. For example, Columbus has a historically tight vacancy rate of 1.7%, and Indianapolis has a rapidly expanding inventory with nearly 23 million square feet under construction in late 2022, yet vacancy remains tight, at 2.5%. Additionally, Indianapolis' rental rates are, on average, about 33% cheaper than Chicago, meaning logistics providers and manufacturers seeking to lower their costs are regularly eyeing the market for relocation or expansion.
However, there are some disadvantages to investing in industrial real estate in 2023. For example, while close to 16 million square feet was under construction in Columbus at the end of 2022, this may not be enough to meet steadily growing demand. Additionally, rent growth in Columbus has not yet materialized, with rents increasing by only 3.2% over the year.
What are the most important financial considerations when investing in industrial real estate in 2023?
When investing in industrial real estate in 2023, the most important financial considerations are the current market conditions, the cost of the property, and the availability of financing. It is important to research the local market and understand the current trends in order to make an informed decision. Additionally, it is important to consider the cost of the property and the availability of financing. For example, build-to-suit construction loans can be used to finance the development of industrial properties. Additionally, acquisition loans can be used to purchase existing industrial properties. For more information on financing options, you can visit this page.
What are the best strategies for financing an industrial property investment in 2023?
The best strategies for financing an industrial property investment in 2023 depend on the type of loan you are looking for. For example, if you are looking for a build-to-suit construction loan, you should look for lenders that specialize in this type of loan. On the other hand, if you are looking for an acquisition loan, you should look for lenders that specialize in this type of loan. In either case, it is important to keep an eye on the fundamentals at both a national and local level to ensure you are making a good investment decision.
We can help you find the right loan for your situation. Our advisors can connect you with a wide variety of lenders to get a quote at no charge. To get started, head to our portal and enter your details in the form.
What are the most important tax implications of investing in industrial real estate in 2023?
The most important tax implications of investing in industrial real estate in 2023 will depend on the specific tax laws in place at the time. It is important to work with a qualified tax professional who is familiar with the current tax laws and any potential changes that may be coming in the future.
For example, the Tax Cuts and Jobs Act of 2017 made significant changes to the taxation of capital gains, and these changes may be extended or modified in the future. Additionally, the Biden administration has proposed increasing the capital gains tax rate for high-income earners, which could have an impact on industrial real estate investors.
It is also important to be aware of any deductions or credits that may be available for industrial real estate investments. For example, the IRS allows for deductions for depreciation of the property, as well as deductions for certain expenses related to the property.
Finally, it is important to be aware of any state or local taxes that may apply to industrial real estate investments. These taxes can vary significantly from state to state, so it is important to be aware of the specific laws in the state where the property is located.
For more information on the tax implications of investing in industrial real estate in 2023, it is best to consult with a qualified tax professional.
What are the most important legal considerations when investing in industrial real estate in 2023?
When investing in industrial real estate in 2023, it is important to consider the legal implications of the investment. It is important to understand the local zoning laws, as well as any applicable building codes and regulations. Additionally, it is important to understand the terms of the lease agreement, including any restrictions on the use of the property. It is also important to understand the tax implications of the investment, including any applicable property taxes. Finally, it is important to understand the terms of any financing agreement, including any restrictions on the use of the loan proceeds.
For more information on legal considerations when investing in industrial real estate, please see the following resources: