Top 5 Reasons to Invest in Industrial Real Estate
By Michael Hironimus
Well we’ve started the new year and perhaps you’re looking at your portfolio results from 2011. You may have had a great year or a poor year, or maybe you are tired of working so hard on your investments that you’re ready to make a change. I’ve listed 5 good reasons to take a look at Industrial Real Estate, particularly in the San Francisco Bay Area. When you compare industrial to other types of real estate or even to other types of investments, you may want to add industrial to your portfolio for these reasons. Please feel free to add other ideas or comments.
#1. Less Management Headaches. Industrial RE is often leased by hard-working blue collar types that handle things themselves. Often, rather than complain about a burned out light bulb or a backed up toilet, they just go ahead and fix things themselves. It’s rare that you have problems with systems overall, unless they are in need of updating or there are more major issues to address. Furthermore, with industrial there is typically little to no landscaping issues or other headaches found with other types of commercial real estate.
#2. Greater Long Term Stability. I wrote about this not too long ago in one of the quarterly reports. Industrial is 
typically more stable overall in the long term due to the overall length in leases. Industrial leases are typically signed in the 3-5 year lease range, with 10 year leases not out of the question. When you compare the leases of industrial real estate to other types of commercial real estate such as office, hotel and multi-family, there is less turnover which equates to a decrease in potential lost revenue. In the graph on the right you can see that overall industrial fares the best when you look at distressed property due to greater stability and shorter vacancy periods. The property type with the greatest amount of distressed properties (hospitality) happens to also be the shortest lease of them all; usually only a couple of nights at a time.
#3. Cap Rates/Returns. In most cases, you are not going to hit a home run on an industrial piece of real estate. Unlike that hot stock you bought that tripled in price or that home you flipped, you are not going to see crazy amount of appreciation in typical years. But that’s not necessarily a bad thing as we’ve seen in recent years. Let’s face it, industrial real estate is not the sexiest type of investment you can have. More often that not, you would be happier to pull out your Berkshire Hathaway stock certificate or drive someone by your updated strip mall, than take someone to the “industrial side of town” to see a square box with a few dock high doors. Yet that’s precisely the point. Industrial real estate rarely has the wild swings of the market and therefore rarely has the downside that goes with a retraction in the economy. In the SF Bay Area, you can see positive returns in the 7-15% or more in good years, but having some stable real estate returns in your portfolio are more important and may help you sleep better at night.
#4. Industrial RE is flexible. Industrial can come in a variety of shapes and sizes. As long as zoning applies, you can have a warehouse with not a lot of office, you can have a space that’s heavy on office with some warehouse for distribution, you can turn your warehouse into biotech space, you can turn a warehouse into a baking facility…you get the point. Industrial real estate gives you the flexibility to cater to a tenant’s needs better than other type of real estate. For example, it’s very difficult to turn an apartment into a mixed use space, and you certainly won’t turn an office complex into a warehouse, but industrial allows you a certain amount of flexibility in working with a lessee to make a space that’s appropriate, zoning and tenant improvement costs notwithstanding.
#5. Industrial RE is shrinking. We are seeing an urbanization renaissance in the U.S. right now. Dilapidated industrial buildings are being turned into hip night clubs and chic lofts, while very little new industrial construction is occurring in the urban and suburban areas. I recently read a great article from Zelda Bronstein, titled “Industry and the Smart City“, which explains how many zoning and planning commissions are essentially squeezing out industrial real estate in urban and suburban areas for a number of different reasons. It’s a good read and points to a more dire issue that urban cities may face in the future. As former industrial areas are being rezoned, such as South San Francisco’s Cabot, Cabot, and Forbes area, there is less room for suppliers and distributors to access and store their inventories. From an investor’s supply/demand perspective, this means that industrial should only become more valuable in these areas as businesses long to be closer to the cities they supply.
Now, tell us what you think.
Also, we try to keep you up to date on the state of the Industrial market specifically on the SF peninsula, but if you aren’t getting the information, subscribe to our newsletter. Also, if you are considering adding real estate to your portfolio in the New Year, be sure to work with an industry professional to discuss the benefits and risks along with a comprehensive list of available investments. Happy New Year!
The Peninsula Industrial Pros 