Industrial Assets – A Shifting Investment Paradigm

It has been estimated that as much as $97 billion will be invested in the US commercial market by global investors in 2011. DTZ, a British-based real estate services firm, stated this represents a 54% increase from their December 2009 prediction. In short, growing confidence in real estate investment will pull investors off the bench – leaving the industrial sector poised to benefit. However, investors scrambling to find viable and profitable net lease investments are running into a short term problem. There is a lack of both current supply and new industrial construction in the pipeline.

Investors want quality, top rated tenants in the strongest urban markets. These investments are increasingly rare. However, “Mission Critical” net lease industrial assets are available - investors may just need to rethink their criteria. These properties often have existing permitted industrial uses, are located in and around quality commercial markets, and provide goods and services unique to their businesses. The real values of these investments are not only the tenant, or even the property, but the permitted use so critical to the nature of the business. Sellers are willing to sign long-term leases at higher returns than current market rates because these properties are so critical. Increasingly, investors are overlooking traditional analytics and considering these investments. With intelligent investment they can provide a highly profitable return.

Another strategy worth a long look is value-added investing. As infill land becomes scarce and land prices rise, this opportunity makes increasingly more sense. According to Marcus & Millichap, last year approximately 30 million square feet of industrial space totaling $2 billion was sold for redevelopment or demolition nationwide.

Value-added investing provides an opportunity for 3^rd party or sale-leaseback owners who are able and willing to renovate or retro-fit their properties. Often these buildings are structurally sound with adequate ceiling heights but need functional changes such as more loading docks, upgrades of fire protection systems, lighting, HVAC, or internal reconfiguration. A quality rehab in the right location can command the same rates as new construction in outlying, less desirable locations. In addition, rehabbed properties in the right location can double their pre-renovation value.

Mature buildings and mature industries provide an opportunity for buyers and sellers to think creatively in making their real estate NNN play.

W. Douglas Wright | Director- Industrial
CALKAIN COMPANIES, INC.