Commercial Industrial Property Basics

Knowing commercial industrial property basics is knowledge one should definitely have before investing. Learning about the different types of commercial industrial properties is key to making wise investment choices in this arena. Different types of commercial industrial property include the following:

• Bulk Warehouse- Very little or no office
• Office Warehouse- Less than 3-5% office
• Office Service-Typically ground height to bring trucks in and out of a building
• Freestanding- Single tenant
• Multi-tenant- Multiple tenants
• Large manufacturing- Very specialized and tend to be owned by occupant
• R & D I Flex- Warehousing people who rent out office space with easily movable walls in a warehouse situation. This phenomenon has slowly come from California across country and by the time they get to some states, it is often illegal
• Industrial Park- Not a building, but land that usually needs to be re-zoned and developed

NOTE: Some of these we will focus on in this manual more than others, because they are more appropriate and easier to break into for the kinds of students who would be purchasing this course.

Bulk Warehouse

Bulk warehouses are usually the larger warehouses that you see. Normally, a bulk warehouse is single tenant as opposed to multi-tenant. The standard bulk warehouse is usually 5% to 10% office space for running the company office, but the rest of the building is basically warehouse. If you invest in small individual buildings, they will be relatively inexpensive to buy or build and easy to rent.

Office Warehouse

An office warehouse is a great place to start commercial real estate investing, if:
• You’re going to be investing in warehouse space
• You want to become involved with warehousing and the warehouse type of business. In this instance, let’s say you’re building an office warehouse. Your first step would be to review zoning and any other legal issues.

Most counties only allow a specific footprint that is the actual area on which the building sits, which takes into account environmental impacts associated with constructing the store. This may include any related site characteristics, such as a transportation footprint, operation footprint, or the waste footprint.

There may be other zoning restrictions, such as the percentage of land that can be built upon, versus what percentage must remain unused. In our case study example, you will be allowed a footprint for this property of 12,000 square feet. This is calculated as a percentage of the total square footage that you’re buying. So, you’re going to develop a building with 12 units of 1,000 square foot units. The building will be an office warehouse.

Normally, you would probably design your building with roll-up doors at the front. Your office space is about 10% of the overall floor space. So, with a 1,000 square foot unit, that calculates into 100 square feet of office space. You want to build 100 square feet of office and one bathroom, with drywall in the office area. This is a steel building that costs $40 a square foot, which is very inexpensive.

Investing in Industrial Properties: Office Service, Multi-Tenant, and Large Manufacturing

Knowing the basic differences in investing in industrial properties such as office service, multi-tenant and/or large manufacturing properties in the basis for making sound investment choices.

Office Service Properties

Investing in office service properties is generally a profitable enterprise. A typical office service would be a plumbing company. The standard office service building is probably about 50,000 square feet with 15,000 of that space used for the showroom to display commodes, bathtubs, and faucets. However, they also have a huge inventory in the back, which is where most of their business is conducted.

Freestanding, Multi-Tenant, and Large Manufacturing Properties

When investing in industrial properties such as freestanding, multi-tenant, and/or large manufacturing properties, remember that freestanding buildings are usually larger and mostly single-tenant. In fact, the single tenant is often the owner in this kind of property. You can group freestanding, large manufacturing, and even multi-tenant buildings all in the same category in the initial stages. However, experienced commercial property investors and realtors would advise beginner investors to stay away from this type of property. It’s more of a specialty-type property, meaning that you must really understand the industry and the business.

To examine the issues of investing in this market, consider the following example. Let’s say you have the opportunity to buy a multi-tenant building of 100,000 square feet both for an investment AND for the headquarters of your own business. It suits your business purposes and has space for two other tenants.

Tip: The vast majority of the time in this market, even with just three tenants, one of the tenants is the owner of the building. This is a substantial building that’s in the multi-million dollar range, but with three tenants, basically it means that you have about 33,000 square feet per tenant.

That may sound like enough room for everybody, but if one tenant moved out, you just lost one-third of your revenue. It takes quite a while to rent 33,000 square feet, particularly in a building that usually has some kind of specialized function. You could be empty for as much as a year or two- or more.

Now, you have to decide if you can withstand that kind of deficit. If you are lucky, two-thirds of the building will carry the mortgage and the other one-third is your profit. So, it might be okay, but you will still barely break even for a significant length of time, and no investor wants to do that. These specialty areas are not good places for beginning investors, even if they have another business that could use that space of 1/3 of the building for themselves. In our opinion, it’s risky. We advise you invest in the areas where you won’t get hurt and you know that you can manage the risks.

NOTE: Ask yourself if what risk is involved every time you invest in a particular piece of real estate. Whether investing in industrial properties such as office service, multi-tenant, and/or large manufacturing properties or any other commercial property, weigh all factors first.

Industrial Property Buying Tips and Tools

Industrial property is the entry point for many property investors to the commercial property industry. As a property type, industrial property is relatively straightforward with little complexity. The property owner just needs to target and strategise the following issues when looking for a property to buy:

  • Stable tenants
  • Achievable rentals
  • Good property location
  • Industrial property precinct
  • Growth of the local community and business sector
  • Vibrant industrial community supplying services, products, and raw materials
  • Access to transport links, ports, airports, and railheads

So now let’s look at the industrial property needed today by tenants.

What do Industrial Tenants Need?

Traditional warehouses will include quality height, size, loading and unloading facilities, quality office space to support industrial operations, ample car parking for staff and customers, hardstand areas for operational flexibility, and high levels of security to protect the tenant’s goods and their operation.

Industrial tenants today are far more sophisticated and demanding when it comes to selecting a property to lease or buy. The investor should therefore select a property that has all the elements of property usage that tenants expect in the local market. Tenants know that the property will impact operational costs and eventually the bottom line of their business. Tenants will choose their property well as a consequence.

Taking the First Step to Investment in Industrial Property

Industrial warehouses are simple to construct and have a long economic life hence the investor sees it as an entry-level investment vehicle and popular. Providing they select a sound and strong tenant, and apply a good lease, the stable future of the property for investors is normally achievable.

There is very little management required on industrial property, and as direct result many private investors will manage industrial property themselves. Unfortunately this does have negative connotations, in that the first time investor sometimes has little awareness of the specialist terms and operational conditions that is supported by lease documentation on their property.

These first time investors can then overlook critical matters and make mistakes. To the experienced commercial property specialist and commercial real estate agent, it is easy to see these ‘first time’ landlord managed properties as you drive through a town or city. The errors of ownership are visually obvious. These errors can even reflect in the ultimate levels of rent and price on the property.

Invariably and importantly this self management problem will surface at final sale or rent review time when the investor has overlooked something or transacted it incorrectly. The buyers of property today will conduct a due diligence period and investigation of any property prior to settlement.

Those property owners that manage their own investments should only do so only when and if they completely understand the complexity of the task at hand. If the investors have only a basic understanding of property performance and function, then they should not self manage the property. The matter is plain and simple.

Critical property knowledge will involve key functional elements such as:

  • Types of rental
  • The lease clauses and provisions
  • Property maintenance strategies
  • Property operational costs
  • Contractor management
  • Vacancy resolution and strategy
  • Incentive use and strategy
  • Tenant negotiation skills

A good property solicitor is invaluable when it comes to Investment Property. The same should be said for a property experienced accountant. Even the most basic industrial property needs carefully prepared lease documentation and financial guidance. It is interesting to note that many first time property investors will sometimes choose cheaper lease documentation that is ‘generic’ and available off the shelf. Cheap is not a good option when it comes to documentation in investment property. You get what you pay for and so why would you take this risk?

Given that you are endeavouring to protect and stabilize cash flow, a few dollars saved on lease documentation preparation at the start of any occupancy can eventually lead to property instability or downfall, loss of tenant, higher property operational costs, and uncertainty when it comes to exercising the critical terms and conditions of the document of lease.

A good property solicitor will understand the occupancy needs of the particular property and reflect that into the document used by the landlord to protect occupancy and cash flow. The same solicitor can create a standard lease document and strategy that targets the landlord’s cash flow plans and investment targets. You will not get this advantage from ‘generic’ leases.

Industrial Properties Outgoings Advantage

Many Investors seek to purchase and to lease industrial property to major industrial businesses under long term net leases. In long term net leases, these larger tenants would normally control and pay the property outgoings direct.

The property outgoings in an industrial property are normally simple although there is an essential checking process needed here to see that the tenant is correctly paying the outgoings in a timely fashion. In many circumstances and in this market, we have seen some tenants avoid the payment of outgoings without the full awareness of the landlord. This then creates unnecessary fines and legal disputes for outstanding outgoings accounts. The landlord must not assume that the tenant has discharged or paid the outgoings; the landlord can later find that the matter is still outstanding and about to go to court for non-payment. Rates and taxes (statutory charges) are usually a charge on the land and will ultimately fall on the landlord for payment.

So whilst this process of tenant paying outgoings direct is convenient and simple for the landlord, such leases have little substantial increase in rental return which may not necessarily support the investor’s growth plans. Investors of this ‘basic’ nature typically hold a number of properties of this type over the long term to allow them to achieve portfolio growth.

With industrial property it pays to recognise that the property may be uniquely and specially suited to a particular tenant. This means that the vacancy threat in industrial property must be carefully monitored as any lease reaches the end of term. It is not unusual for industrial property to remain vacant for a lengthy period in the current market.

Mortgage Lenders and Industrial Property

Mortgage lenders for fully leased warehouses occupied on the long leases see them as being good collateral for loans. Long-term financing is typically available for industrial investors at competitive interest rates. The investors of industrial probably find it easy to refinance an expanding portfolio on the back of their established industrial and well leased property.

The secret to success in industrial property investment is to have:

  • Good leases
  • Good tenants
  • Good vacancy awareness and minimisation strategies
  • Sound recovery of property operational costs
  • Good maintenance controls
  • Good insurance strategies
  • Minimal exposure to risk from the property
  • Well established permitted use and compliances
  • Good income and expenditure budgets

Industrial property is the market segment that is normally suffering early in an economic downturn. That is due to the close integration between the industrial business community and the consumer. Fortunately, it is the industrial property market that responds quickly when the economy moves towards growth and stability. Landlords should respect this fact and monitor their way through the downtimes as they will always come and go.

Investment Property is cyclical and will on average move through a complete cycle every 7 to 10 years. In today’s market, many investors know that real opportunity exists today at the beginning of a new property cycle. This cycle is currently evident in most countries and major cities.