Industrial Properties Instead of Residential in the U.S?

Hi everyone. It’s been a long hiatus for me on this forum but wanted to stop in to read some posts to see what is going on. I am working with a variety of investors from Germany, Australia, Singapore, etc. The common complaint I am hearing is property management and how recent buyers are not achieving gains they thought they would. One of the main reasons is margin of error. Prices on homes have spiked quickly over the last year, outpacing rental rates. Although rental rates are also surging, they are not at the rate of home prices. One bad month can totally ruin your ROI and take you from a 9-10% pro forma to a 2-3% actual return. This is the case regardless of when you buy, but more risky today.

Which leads me to my next point of Commercial real estate. As the housing market goes, so do the suppliers. If the analysts are about accurate with the prediction that they foresee a good 8 year run on the housing market, that means Industrial assets will become good value plays. Industrial properties consist of buildings with warehouse space and typically up to 20% of the gross space is air conditioned office or showroom.

As most of you know, my territory is Southwest Florida. I am based out of Fort Myers. Although I dabble in retail, my expertise is multifamily and industrial properties. Why? Because they work hand-in-hand with one another. Manufacturing & Distribution is at all time highs right now and rental rates are increasing like crazy. They will continue to increase and I believe that industrial value is what existing multifamily value was a year ago. Good warehouses space is running on low supply. Vacancy rates are down to nearly 5% from 8% a year ago.

The nice thing about commercial, specifically industrial, is that tenants sign 3-5 year leases and many of them have a renewal clause in the lease for another 3-5 years. In today’s market, the leases are guaranteed by the business owner or by their corporation, only if it is established and able to be collateralized. Sounds much better then the Section 8 tenant so far, right? Some buildings are Net leases and some are Gross leases. That is a topic for another day.

Industrial leases have annual escalations in them so today’s base rent will go up next year, and the next, and the next. In today’s market, everything we are doing we increase 3% annually.

So… you have a quality industrial building…Longer leases that are guaranteed by quality…Low Operating Expenses… and 8%+ Cap Rates. If you are able to find financing, your levered return will be very attractive as well.

In southwest FL, good quality industrial assets range from $50-$68 per square foot. The price depends on location, condition, and features (grade level or dock height…ceiling height…type of construction…clear span)

Lastly, industrial is by far the EASIEST most self sufficient way of managing. Some of my foreign clients don’t even choose to use third party management. The tenant does a direct deposit every month into the landlords operating account and if maintenance is required, we keep a record of at least 3 subcontractors per trade for our clients to e-mail for bids. You also don’t get the potential significant maintenance risk you get with residential or retail. If the fridge breaks in the office, the tenant replaces. The only thing the landlord is responsible for is the structure and air conditioning for the most part. Easy Peasy. So if you are looking for diversity from the residential market, I encourage you to look into Industrial.

• This topic was modified 10 years, 4 months ago by  CheevesFinancial.
• This topic was modified 10 years, 4 months ago by  CheevesFinancial.