Commercial real estate generally falls into four main asset classes: office, retail, multifamily, and industrial. The first three types of commercial property are places where people work, live, and shop. Industrial commercial real estate, in contrast, encompasses properties where goods are developed, made, stored, and shipped.
This article covers the different types of industrial commercial real estate, how it differs, and what to consider before investing.
What is Industrial Property?
NAIOP defines different types of industrial property as buildings used primarily for manufacturing, research and development, production, maintenance, storage and distribution of goods. Industrial property can also include office space as part of an industrial building’s floorplan.
Why Investors Want Industrial Real Estate
Commercial real estate investors are attracted to the industrial real estate asset class by the high demand for industrial space to rent and the consistently stable, long-term returns.
A quick look at the national performance of industrial property highlighted in Cushman & Wakefield’s Q2 2021 US Industrial MarketBeat explains why so many investors are searching for good industrial listings to purchase:
- Rent growth up 6.8%
- Vacancy rate 4.5%
- New leasing activity 212.5 million SF year-to-date
- Net absorption 110.2 million SF year-to-date
- New construction 476.1 million SF
In Q2 2021, over 70% of the top 81 industrial markets posted year-over-year increases in new leasing activity. Year-to-date, 27 markets have seen more than 5 million SF of net new leasing activity, and 58 markets have seen over 1 million SF of recent leasing activity. The surge in demand for industrial space is putting the market on track to see yet another year of new leasing activity surpassing 600 million SF by the end of 2021. Do the math, and that adds up to a lot of tenants interested in industrial listings.
Different Types of Industrial Property
Let’s break down the eight most common types of industrial commercial real estate.
- Heavy Manufacturing
Manufacturing buildings are used to assemble, convert, or fabricate raw or partly wrought materials into products, goods, and services. Massive manufacturing properties may have hundreds of thousands of square feet of space and house large factory equipment pieces and machinery.
- Light Manufacturing
Industrial properties used for light manufacturing are generally smaller and more straightforward to lease to a new tenant, thanks to their easily reconfigurable interiors. Equipment and machinery in light manufacturing buildings are usually easier to move than the massive equipment onsite at a heavy-duty property.
- Warehouse and Distribution
Warehouse and distribution industrial properties are usually large, single-story buildings. Ceilings stretch 60 feet high or more and are designed to accommodate extensive racking and storage systems. Floorplans are typically configured with small office space and site plans allow for numerous loading docks and large parking lots for semi-trailers or rail cars.
- Cold Storage
Refrigeration and cold storage industrial buildings are equipped with cold storage or freezer space to manufacture and distribute food products. Cold storage buildings often lease to single-tenants on a net lease, such as large national food distribution companies like Sysco Corporation and US Foods.
Flex (or flexible) industrial buildings are designed for a variety of different uses. They are usually free-standing buildings located in larger industrial parks, with a higher percentage of office space than other types of industrial property. Ceiling heights in flex industrial properties are usually under 18 feet, making flex property a good match for various uses, including research and development, small warehouse,distribution facilities, and light manufacturing.
Showrooms are the most common type of flex industrial space with the most basic construction and floor plans. Up to 50% of the layout is used for sales or display space for showcasing products. Common types of showroom property include car dealerships,fashion design, and production space.
- Data Centers
Data centers are special-purpose properties found in industrial parks near major communication trunk lines with access to large and redundant power supplies. Common uses for data centers include telecom hosting centers, switching centers, cyber centers, and web hosting facilities. These facilities have specialized HVACs, very few employees, and house countless rows of computer servers and telecom equipment.
- Research and Development
R&D and biotech laboratories are two other types of industrial properties used by businesses in high technology industries, including computers, biotechnology, and chemical or drug testing and analysis. R&D industrial property sits in campus-like industrial parks with extensive landscaping, open space, and large parking areas. These special use buildings require specialized plumbing, water distribution systems, and temperature and humidity controls.
Performance Snapshot of US Industrial Real Estate Markets
Next, let’s take a quick look at the top industrial real estate markets based on inventory’s critical investment criteria: asking rents, vacancy, and net absorption through the end of last year.
Largest markets by inventory
- Chicago 1,181,794,334 SF
- Los Angeles 992,238,072 SF
- Dallas/Ft. Worth 815,577,048 SF
- Atlanta 654,735,333 SF
- Inland Empire 578,034,460 SF
Highest asking rents
- San Francisco Peninsula $20.46
- New York Outer Boroughs $20.05
- San Jose (Silicon Valley) $15.27
- San Francisco North Bay $14.85
- Puget Sound – Eastside $14.74
Lowest vacancy rates
- Providence, RI 0.2%
- Orange County 1.6%
- Inland Empire 1.7%
- Los Angeles 1.7%
- Philadelphia 1.7%
Leasing activity (Q2 2021)
- Dallas/Ft. Worth 18,903,460 SF
- Chicago 13,054,962 SF
- Houston 12,507,737 SF
- Los Angeles 11,476,101 SF
- PA I-81/I-78 Distribution Corridor 10,954,290 SF
Greatest net absorption (Q2 2021)
- Chicago 11,976,836 SF
- Atlanta 10,481,983 SF
- Inland Empire 9,866,056 SF
- Dallas/Ft. Worth 7,794,255 SF
- PA I-81/I-78 Distribution Center 6,143,420 SF
Industrial markets in the West and Northeast regions are expected to see the most imbalance between supply and demand, with 4.0% or less vacancy rates. The markets currently seeing the tightest demand for industrial real estate will continue to perform strongly. These markets include Orange County, Philadelphia, the Inland Empire, Los Angeles, Central New Jersey, Boston, Fort Myers/Naples, Boise, Reno, and Hampton Roads, VA.
Industrial Market Outlook in 2021
All indications are that the industrial real estate market will remain hot through the rest of 2021 and into 2022, seeing solid demand for industrial property from tenants and investors. Cushman & Wakefield predicts that net absorption of industrial space will exceed 200 million SF, with just over 36% of industrial property under construction already pre-leased. New supply will bring quality space to the market for occupiers and commercial real estate investors to consider, with asking rents increasing through the end of the year.