Getting Started in Industrial Property Investments

If you are conservative or a beginner investor, you would want to purchase a pre-constructed building to get started in industrial property investments. You don’t have to build new to get started.

However, be prepared to ask yourself some hard questions, such as, “Is it a marketable location, or is there a market for this type of building?”

For example, say you have two buildings the same size, 10,000 square feet: one priced at $450,000 and one at $600,000. If the rent is slightly less in the $450,000 building than the rent in the $600,000 building, you may consider the $450,000 building a better deal because rent can always increase over time.

If the buildings are the same age and size, usually the difference in price becomes a function of location. These types of buildings are usually located in small industrial or commercial parks, where zoning is appropriate. Other differences may also impact the price. For example, if one building is ten miles out of town and the other is 1.5 miles, the closer one is a better property, but it will probably cost you more money.

The practical point of view must also be considered, though. The building that’s 1.5 miles away is much easier to keep tenants because more people want to be there, rather than at the 10-mile location. Although you can buy the building 10 miles out at a cheaper price, you have no real benefit.

When you are offered a good deal, like a little shopping center just down the street- but cheap, real cheap- be very careful. Even if they just want $80 a square foot for it, start looking for reasons why it’s so inexpensive. For example, check the occupancy rate. Perhaps it’s vacant right now, which is why it’s such a “good” deal. If it’s been vacant for some time, of course, it’s going to be cheap.

However, before you worry about cheap, worry about why there are so many vacancies, because that’s far more important than the low price. If you buy a low-priced little strip center at $80 a square foot, which is considered inexpensive in most areas, and it’s 10,000 square feet, you bought it for $800,000. Agreed, that’s cheap! But if it can’t get any tenants, how good is “cheap?”

When considering industrial property investments, you must also determine the marketability of a particular neighborhood. To do so, drive every street in that little commercial area and look for vacancies highlighted by ‘For Lease’ and ‘For Rent’ signs on similar properties. Every time you see a sign, call the number on it. Tell them your name and that you’re calling about the property with the ‘For Rent’ sign on it. Ask them how many square feet if it’s a good deal, and if they have anything else. Tell them what you’re looking for as if you’re a prospective tenant (properties similar to yours). Be sure to ask around, especially if you are running into some issues, like those related to the environment. You may not be interested in spending the time or the money required to address such issues. These are all factors you must consider as well.

If you’re going to get into this commercial arena, you need to be willing to take a little bit of time to perform your due diligence- do your homework and check things out. Although you usually do this research in the residential market through the MLS, you’re going to find that many commercial properties are not on the MLS. Most commercial and industrial properties that are actually for sale are listed on specialized databases like http://www.LoopNet.com. These databases tend to be national in scope and usually charge subscription fees.

Typically, when looking for industrial property investments, we are NOT looking to buy from properties that are listed for sale (such as those on Loopnet.com and other similar commercial property listing sites) but from among the vast majority of properties that are NOT actively being marketed for sale. Check for tips on this technique in a forthcoming article.

What Creates a Great Industrial Property Site

Industrial property has some common location factors that will make the property much more attractive to most purchasers or tenant businesses. When inspecting industrial property you could use this list as a guide to its marketability.

In saying that, also note that many industrial businesses will also have additional specific location factors unique to their business that will impact the decision on the property. Direct questioning should help you identify most of those extra things needed.

So when you get to the real location decision maker and the key person of the industrial business you can proceed down this path. The most common and desirable factors in an industrial property then are:

  1. Proximity to good road and highway access. Consider the types of deliveries that will be coming and going from the property. How far away from the main freeways is the property located and can large trucks get to and from the freeways easily?
  2. Abundant labor supply is fundamental to the function of any industrial business. You should identify where the labor supply will come from and how they will get to the property. Remember that the access to the property may be necessary at any time of day for the staff and labor. Could any nearby public transport be of some use?
  3. Car parking on the property is a premium and high priority for many businesses today. When the staff arrive at the property by motor vehicle is there sufficient parking for the staff without interfering with customer car parking?
  4. Availability of extra land and hardstand area on the property is important to some businesses. The storage of materials, containers, and machinery is a critical issue for many industrial businesses. Take measurements of the exterior of the property and the distances for truck movement and storage.
  5. Proximity to sea and air ports may also be critical for some businesses. Having details of the port access will be of advantage in any of the inspections you take to the property.
  6. Rail transport heads for large and heavy goods transport should be known. If heavy goods are to be transported to and from the property, much of that transport will firstly be on the rail system if it is available. The distance from the rail system to the property will be bridged by trucking. The shorter distance the trucks have to travel from the rail head, will help the business with operational costs.
  7. Services at the property should include water, gas, three phase electric power, bitumen roads, kerbing, telephone (mobile and fixed), and internet access. All businesses today need these services as a minimum to remain operational and competitive.
  8. Proximity to raw materials should be known. This will be specific to the business in question, although the answer should be considered. Can the raw materials that a business needs be accessed easily and how will that be done?
  9. Onsite improvements are important based on the business to be located there. The improvements will include modern and flexible office space, warehousing, and hardstand storage. What you will need to have is the size and capability of each improvement type. With industrial property the focus is generally on production and hence the warehouse design, layout, and size will be critical to the business function. Large trucks should be able to be directly loaded and unloaded in, from, or to, the warehouse. Double handling of goods to the warehouse is not practical and is expensive.
  10. The zoning of the property will have relevance to the type of business that can operate from the property. In all cases the zoning capabilities and restrictions should be known before any inspections are taken to the property.
  11. Area for future expansion on the property is always desirable. A successful industrial business will want that space at some future time and relocation costs are high. Knowing that the property could provide expansion of improvements and operational capability for the occupant is an advantage.
  12. Proximity to associated businesses is sometimes important. Knowing that access is easily available to suppliers will keep costs down for the property occupant.

So these are some of the main industrial factors that businesses look for in relocation. Research them and have your answers ready for ever industrial property you have listed for sale or for lease. Selective questioning of the prospect buyer or tenant will then assist in more specific matters.

Sales for Factories Slow While Prices for Industrial Properties Grow

The latest report has it that the new Seller’s Stamp Duty (SSD) imposed on industrial properties since 12 January 2013 has worked its spell in crimping demand for strata factories. The SSD slaps industrial properties sold within the first three years after purchase with varying rates of stamp duties. The below shows the SSD rates for sale made during the different years.

Seller’s Stamp Duty (SSD) Rates

Holding period = 1 Year

% of price or market value, whichever is higher = 15%

Holding period = 2 Year

% of price or market value, whichever is higher = 10%

Holding period = 3 Year

% of price or market value, whichever is higher = 5%

SLP International reveals that sales of strata factory units declined from 133 in the 28-day period before the imposition of the SSD to 118 in the period after. Breaking down the data into new, sub-, and re-sale, the figures show that demand fell across all categories too.

This is in contrast to the post time-frame after the 5th and 6th rounds of cooling measures in 8 December 2011 and 5 October 2012, respectively, when new sale and subsale rose; while overall sale figures fell. Specifically, for the 5th round, new sale spiked from 78 in the 90-day period before the cooling measures took effect to 170 after. For the 6th round, subsale edged up from 65 to 81 in the pre- and post-period, respectively.

Prices of strata factories with 60-year leases, on the other hand, demonstrated a steady upward trend since the start of 2011, according to Knight Frank. The 5th and 6th round of cooling measures which only involved curbs on the residential markets served to transfer demand to the industrial segment, fuelling price increases.

However, demand in the second half of 2012 might have been dampened by the imposition of a 30-year cap on the tenure of industrial GLS (government land sale), according to Lee Lay Keng, head of Singapore research at DTZ.

For this latest round of measures, it is too early to gauge the effectiveness of the SSD. Less than one quarter has passed since. Senior manager, consultancy and research, Alice Tan, at Knight Frank said that at least two quarters are needed before the impact of the SSD on prices and sales can be ascertained.

The observed lower demand could be due to a knee-jerk reaction from buyers and the approaching Chinese New Year then, noted Tan Boon Leong, executive director of industrial services at Colliers International.

According to DTZ’s Ms Lee, SSD may have limited impact since it will not be a deterrent for owner-occupiers, Reits or developers with a long term view. Moreover, the cooling measures in the residential market will drive buyers to the commercial and industrial segments. Still, price growth is expected to slow due to the regulation imposed by the Urban Redevelopment Authority on non-qualifying users, which could affect rental income.

Using price data of strata factories and warehouses, I found that average unit prices per sq foot (psf) of industrial properties continue to experience price growth in the month after each round of cooling measures except for the 5th round of measures when average month-on-month price dropped by some 6% in January 2012.

Even as demand for strata factories softened following the imposition of SSD, average unit price for all industrial properties grew by about 8% for February 2013 from January 2013. This is in agreement with the findings of Knight Frank, on 60-year lease strata factories, which showed that new sale price remained steady up to February 2013, averaging $420 psf.