Commercial real estate generally falls into four main asset classes: office, retail, multifamily, and industrial. The first three commercial property types 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 they differ, 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 floor plan.
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 Crexi’s Q3 2023 national trends report explains why so many investors are searching for good industrial listings to purchase:
- Rent growth an average of $0.94 per SF per month, up 2.2% YoY
- Pricing growth an average of $163.51 per SF, up 4.66% YoY
- Average cap rate ~6.39%
- Net 5.62 million SF sold in Q3
- $1.46B total sold in Q3
Different Types of Industrial Property
Let’s break down the eight most common types of industrial commercial real estate.
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.
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
Warehouses are buildings primarily used for storage and distribution purposes. They provide storage space for goods and materials, often in large quantities. Warehouses can be operated by manufacturers, wholesalers, or logistics companies. Efficient layout, accessibility, and modern logistics infrastructure are essential for warehouses.
Cold storage facilities are designed to maintain specific temperature and humidity conditions to preserve perishable goods such as food, pharmaceuticals, or biotech products. These facilities require advanced refrigeration systems and insulation materials to ensure the quality and safety of stored items.
Cold storage buildings are often leased 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 various uses. They are usually free-standing buildings located in larger industrial parks, with more office space than other industrial property types. Ceiling heights in flex industrial properties are usually under 18 feet, making flex properties suitable for various uses, including research and development, small warehouses, 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 are specialized facilities that house computer systems and network infrastructure. These facilities are designed to ensure reliable operation and power supplies, high-security levels, and efficient cooling systems. Data centers are critical for industries heavily relying on digital functions, such as telecommunications, cloud computing, and e-commerce.
Research and Development
R&D and biotech laboratories are two other industrial properties businesses use 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 ample parking areas. These special-use buildings require specialized plumbing, water distribution systems, and temperature and humidity controls.
Key Considerations: Searching for Industrial Space for Rent
Industrial space rent is a significant consideration for investors and businesses looking to lease industrial properties. Rental rates can vary depending on various factors, including location, size, condition, type of industry, and local market conditions. Understanding the current trends and factors affecting industrial space rent can help investors make informed decisions or negotiate favorable lease terms.
Some key factors that influence industrial space rent include:
1. Location: Properties in prime industrial areas with high demand or proximity to key transportation routes tend to have higher rental rates.
2. Size and Configuration: Larger industrial spaces or those with special features, such as high ceilings or loading docks, may command higher rents.
3. Market Conditions: The overall supply and demand dynamics of the local industrial real estate market can impact rental rates. In competitive markets with low vacancy rates, rental rates may increase.
4. Lease Terms: The length of the lease, escalation clauses, tenant improvements, and other lease terms can also affect the rental rate.
It is essential for investors and businesses to analyze the rental rates for industrial spaces in their target locations and compare them to the potential revenue generated by their operations to ensure financial viability.
Industrial Market Outlook in 2024
All indications are that the industrial real estate market will remain hot into 2024, though construction deliveries may continue to stagnate demand growth. As e-commerce needs escalate and more specialized industrial spaces become necessary for business operations, industrial will likely continue to see positive absorption. More new supply will add quality space to the market for occupiers and commercial real estate investors to consider, with asking rents remaining steady through the end of the 2023 year.