Should I sell my industrial warehouse?

Question

Looking for some advice here - I have a 15,000 sq. ft. class-B warehouse located in an industrial park of the Chicago suburbs, near O'Hare:

- Acquired for $1m and recent prices suggest I could sell for $140 per sq. ft. ~$2.1m

- Cash flows at $140k annually

I've been self-managing and it has been honestly pretty easy (send invoices, schedule routine maintenance/inspections), but otherwise I have no real knowledge or experience in the industrial space (I mostly invest in STR's). What makes me nervous is that the cashflow accounts for about 70% of my income and I'm wondering if it makes more sense in my situation to sell and diversify. Some questions I would love input on:

1. Have industrial property values been relatively stable over time? Where do people see values trending over the next 5 years? Wondering if I should worry about missing out on "the right time to sell".

2. If I were to keep it, what are some key recommended improvements I could make to add value?

Appreciate the help!

Henry Clark · Answer

OP run the numbers.  Add risk adjustment.

$140k/$1mm return.  There are very few investments that bring that level of return.  If anyone says the S&P 500 disregard them.

You don’t get that type of return in your STRs straight up or risk/hassle adjusted.

Industrial properties the demand analysis is always local and not nationwide.  In a city like Chicago, industrial properties are like ocean front properties.  Only so much exists.  Ask a commercial realtor to evaluate your property both from a value and a rental potential.

How good is your tenant and their contract? Are they NNN?

What does your Capex look like?

If you plan to hold do a Cost segregation if you want cash now.  You can invest that or use to pay down your other loans.

You owe nothing. The major risk on commercial and industrial is losing a renter. But you owe nothing thus the risk is low. Check with the commercial realtor. See if you’re in a tight market. Then the risk of contented is low. Then having 70% of your income exposure in a great investment and at low risk answers your question. Consider your self lucky

Versus selling a great asset, again either do a cost segregation or take a loan out to buy other properties. Personally if it is generating $110k cash flow whether before or after taxes, I would just sit in it. You can buy a new house every year or pay your 8% down.

Just run the numbers

Michael K Gallagher · Answer

I've worked on a couple warehouse deals, not sure if you have a single or multi tenant and what the lease terms or time left on the lease is, but to @Henry Clark s point, that kind of cashflow return for that type of initial investment is awesome.  I don't think that I'd personally trade that in for STR or multi family, the hassle of people is much more than dealing with the hassle of a warehouse business at least in my mind.

but if the cash gets your overall portfolio to a place you'd prefer more then go for it, but personally the current deal sounds awesome.

Bob Solak · Answer

Dan, we are in the Chicago area industrial sector, albeit in the flex, small-bay arena.  Given your described building location and post, I am guessing you are single tenant (seems to be the majority in that Elk Grove, Bensenville area).  Personally, we prefer multi-tenant, to minimize vacancy risk.   But in any case, I would NOT sell a industrial property for STR or multi family.  The level of hassle/management is way higher than a good industrial tenant.  Industrial vacancy rates for your size building are ridiculously low.  If it was dividable into smaller units it would be even easier to fill.

Since you have no debt, you can weather a period of vacancy pretty easily.

To give better advice, we would need to know what your overall goals and situation are.  If it were us, we would keep the property and take out loans against it for investing in additional industrial property.  That will, portfolio-wide, minimize your perceived tenant flight risk, and over time you'll get to an even better cash flow spot.   But it will depend upon how much you really need that $140k in cash flow right now.

As for improvements, that is really tenant-dependent.  For your sake I would make sure, if you aren't NNN right now, that you at least have RE taxes protection in your lease.   I'm assuming you are in DuPage, which is better than Cook, but the long term isn't pretty RE tax wise anywhere in northeast IL.

Caleb Brown · Answer

Echoing what others said, keep. Seems like a great property and will continue to appreciate. Industrial in an area like Chicago will be safe(unless a major event happens), even then those industries don't vanish easily. If you wanted to diversify you could use the income and purchase other properties, slowly add other properties.

Henry Clark · Answer

OP. For some reason I am getting you want to approach this from an emotional versus business standpoint.  So I will approach it from that standpoint.

STRs-  if we have a downturn that will be one of the first investments to go down.  Even if you are the master Guru in both revenue generation and value add for STR its a worse deal.

Equities- are set up for a 50% loss.  S&P 500 has been increasing 25% for the last 2 years each.   Not Earning.  P/E ratio shows about a 3% return.  MAG7 is a worse portfolio concentration than a 15,000 sq ft in Chicago.

You want to possibly use one of your STRs to vacation at.   For $5,000 per week you can rent some really great vacation spots.  Plus you’re not tied to a specific property.  Unless you are buying $1mm STR locations they can’t compete with what you can rent for $5,000 any where in the world.Without knowing your rent rates and facilities.  As mentioned by others.  There is a sweet spot for 2500 to 5000 sqft units.  This would increase your rental rate per square foot.m significantly.   You would need to do some Capex to achieve this.  Look up Crexi or Loopnet in your area.   Availability to buy or rent, rental rates, features.

Post some pictures.  We see what you don’t see.   How much external parking?  How tall are doors and wide?  How is water, sewer, electric and hvac distributed and located?  Etc etc.

Drive around your area.  See who the major RE agents are and call them to assess and look over your property.

Why are you trying to take a great investment to make worse investments either look better by paying off their high interest rates or investing into 10X far riskier investments.

Disregard the emotion above.  Run the numbers.  For all I know you have two daughters getting married and need a bunch of money or they are about to go to college.   These are weighing on your decision.  There are other ways to address than selling.

FOMO-  commercial and industrial property is primarily value based on cash flow and not comparables like houses.  Your property can increase in value easily “if”: A.  You move to smaller units, which I wouldn’t if you have a great tenant., B. You have a lot of hard surface parking available to rent or build in., C. If interest rates go down just 1% point your value goes up.    Easy example.  Don’t need to know if it applies or not.  There are other examples.  Let’s say you can sell fireworks at that location. Just contact a company and rent a spot out for $25,000 for 3 weeks.   Pure profit.  Food trucks, ev stations, parking, etc.

Dan Wang · Answer

@Jaycee Greene no debt. And if I sell I'm thinking... yes, either pick up a couple STR's or a multi family with 1031. Then pay down a few current mortgages that are at 8%. Then invest the rest in equities.

Jonathan Klemm · Answer

Hey there @Dan Wang - First off, amazing deal my friend!  I want $140k cash flow a year!

Maybe @Mark Ainley can provide some advice...he has or had a bunch of industrial properties in Chicago and the suburbs.

Dave Foster · Answer

@Dan Wang FWIW - In the 1031 space we see very few investors who make the switch from "active" commercial investing to "active" residential investing.  We see more investors making the move from residential to commercial/industrial.   Much of it has to do with their original wheelhouse and comfort factor.  Maybe there also a lot to with the rest of your balance sheet as it relates to owning a $2 mil asset.  Good questions to ask yourself - the why's??

When you specifically mentioned STR experience and the possibility of something with some added "personal value" bells started going off.  Sometimes the question isn't "is my property going to continue to be a good investment?".  Sometimes the question needs to be "When not if the real estate cycle impacts my property, do I have the skills to manage a downturn?"  Residential real estate is more forgiving in a downturn.  Generally the thing that keeps commercial/industrial investors afloat is access to large sums of money to survive a downturn.

It sounds more like this property is an outlier in your wheelhouse and portfoliio.  Outliers are generally the things that are more problematic.

It's a great returning property.  But there may be other great returning properties that are more conducive to your skill set/comfort level.

Bob Solak · Answer

Is the higher interest debt on other investment properties?  If so you could run the numbers on taking a loan on the zero-debt property to pay off the other.

I'm still unclear on the goals - you've brought a lot of other things into the equation (e.g. paying of high interest debt, STR as personal vacation home, stocks/dividends, etc.).  If you are saying you need a large cash infusion for other things, then selling (or leveraging 75% of the value) is probably the way to go.

This particular commercial property value is going to be based primarily on the income it can generate (actual or projected) to the buyer. So long as you can keep it occupied and drive up your base rent over time, your property will appreciate and you will maintain (and increase) your equity.  Your cash flow will be as stable as your tenant, but if you can weather a few months of vacancy, I don't think you will have a problem filling the place should they vacate.

By the way, I think $140 per square foot is pretty high.  Anything under $90 in this area usually doesn't pencil out for me as a cash-flow interested investor.  But I tend toward more Class C than B.

Dan Wang · Answer

To answer your questions - yes single tenant on NNN. Lease up Nov 2026

Should I sell my industrial warehouse?

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