Industrial Real Estate Isn’t a One-Size-Fits-All Sector

There’s no question that industrial real estate is the commercial property type of the moment, even if multifamily continues to outrank all others in terms of investment volume. Real Capital Analytics recently reported that sales in the industrial sector set a new year-to-date high-water mark in the third quarter, and separately noted that industrial’s year-over-year pricing growth outpaced all of the other major property types. 

The popularity of industrial, as evinced by some of the large-scale institutional plays we’ve seen in recent months, makes it a foregone conclusion that this momentum will continue. However, CREXi points out that it’s not a sector to enter with blinders on. 

“It’s important to note that many markets are setting all-time performance records due to scarcity of available inventory and demand for large-box bulk distribution facilities, especially in markets near major population centers and distribution hubs in the Southwest,” says CREXi. “While almost every major industrial market in the U.S. is reporting positive net absorption and rent gains, not all industrial CRE markets will offer the same investment potential next year.”  

The firm cites some of the key factors to account for to make the best industrial property investments and some potential risks to consider before investing: 

What makes the best industrial investment: 

• Markets with high industrial demand and limited inventory see upward movements in rent 
• Multi-tenant industrial property leased to users from different industry sectors can help minimize economic risk exposure 
• Flexibility of space configurations appeals to a broader range of tenants and reduces the potential risk of long-term vacancies 

Potential risks of industrial CRE: 

• Declining imports from China may reduce the demand for industrial property in gateway markets  
• Enhanced focus on worker safety initiatives such as smaller shift sizes and deep cleaning of facilities are driving operational costs and the ability of tenants to absorb rent increases 
• Retail mall conversions are estimated to add between 10 million and 20 million square feet of additional logistics space, which could drive net absorption rates down  

“Even after the pandemic runs its course and the economy begins to recover, it’s likely the focus on supply chain will continue to grow,” according to CREXi. “Structural factors propelling increased demand for industrial real estate will continue to accelerate, as companies embrace a two-prong business model of just-in-time and just-in-case.  

“Industrial CRE markets near well-established consumer markets, access to reliable and well-developed transportation infrastructure, and an available supply of skilled labor and business-friendly governments should continue to see strong demand in 2022.” 

Not only the fundamentals of the market surrounding an industrial property need to be weighed. CREXi notes separately that “industrial” is in fact a broad umbrella terms for a variety of property types, ranging from warehouses to showroom space and data centers. Each calls for specialized knowledge to optimize performance.