Does anyone have industrial properties?

Question

I'm certainly a newbie when it comes to commercial investing. I have a good understanding of the due diligence required for multi-family, many aspects that should be considered for retail/office, but industrial properties is a whole other experience.

For those that have invested in industrial properties, can you tell us something of your experience?

Don Konipol · Answer

I have found the ownership of industrial property to be very hit or miss.  I have a small warehouse space (10,000 square feet) in a small town in Texas I acquired through a foreclosure when the borrower (I was the lender) defaulted on his mortgage.  I put it up for lease with nothing but a sign and an asking rent sufficient enough to give me a 22.5% cap.  I received a phone call from a potential tenant (not the strongest credit) within a month, and since this was the only call decided to forego requiring a decent balance sheet.  The tenant negotiated me down to a lease rate sufficent to give me an 18% annual return (we had only lent 55% of value) and a three year lease with 2 three year options.  The tenant has been there 7 years now and with the exception of one month has always paid his rent reasonably on time.

On the other hand I purchased an old car dealership in a much larger Texas city, spent over $100k converting it to specifications for a fairly decent credit tenant, the tenant moved in and their second monthly rent check bounced.  Within 2 months the tenant declared bankruptcy, their reorganization plan was accepted by the court which also voided our lease.  I owned the property for 2 years, was never able to get any other tenant, and finally sold at a substantial loss to an end user.

Now granted I was dealing in "B" property in secondary locations, but since I was trying for double digit annual returns (not including any property appreciation, just cash flow), "A" locations were out of the question.  The big risk I see now is that property owners are willing to tie themselves into long term leases with long term options and small defined rent increases.  If and when high inflation hits having 25 years of low fixed rents (even if from an "A" tenant, will not allow you to participate in the important inflationary protection aspect of property ownership.  I now feel it much better to accept a lower return to obtain a lease that provides for rent increases tied to the CPI.

Rob Gillespie · Answer

We run an 88K sq ft. industrial building. Industrial is the toughest of all commercial space. You gotta know electrical, clear span, loading docks, ceiling height etc... You also gotta look out for EPA issues.  I know BP hates to have us PM and not talk openly, but there is so much to discuss, just PM me and we will set up a call.  I will post cliff notes afterwords for everyone to benefit from. Cant wait to talk to you! :mrgreen:

Darryl Dahlen · Answer

This is a sector I'm making a concerted effort get into with regards to lending. Now that entities can use the SBA 504 loan for purchases and refinancing industrial properties are a good fit for this loan.

Historically, industrial properties have fallen into two categories, light and heavy,

Light industrial buildings typically have one important leg up on their heavy industrial counterparts, and that is fewer environmental issues. Lenders try to avoid environmental issues for a lot of reasons: less liability, increased marketability, costs associated with cleanups, etc.

LI properties also tend to be more palatable to lenders when it comes to financing since they usually encompass business types a lender can understand. From an ownership perspective, I suspect that also makes them a safer bet. I would rather own a facility where the tenant makes clothing and can market their product to many buyers. That should make them less vulnerable to market changes compared to a company who say makes heavy brake pads. How many buyers can there possibly be for that product?

Heavy industrial buildings don't necessarily have to manufacture tanks or heavy machinery to be considered HI. I believe any business that uses chemicals, metals, gases, etc. could be considered HI.  Hypothetically, that could make a company who manufacture parts for a cell phone company a HI business. At first glance, you might not consider a company such as that as HI, but since toxic chemicals are used in the manufacturing process, it would be.

The obvious downside to a HI business/property are the environmental concerns. Another issue that could be considered a downside is if the property is so well-suited to HI that it really can't be anything else without massive capital expenditure to convert it. This is obviously something to consider when looking at a property. Is the property HI because of the past tenants or is it because it has heavy lift machinery, smelting equipment, etc. on site?

There is another type of industrial property that is having success as of late, and that is industrial flex space. This type of property can easily be converted to suit many needs, which makes financing them easier and also makes them more attractive to a wider variety of tenants.

This type of building often has an office space component in addition to space for manufacturing. This allows a business to house their operations and manufacturing  under one roof. It also typically allows for the conversion from warehouse to manufacturing fairly easy which further increases the versatility of the property.

Jade S. · Answer

Great discussion.  Just closed ( ~ 4 weeks ago) on my first flex industrial property (12,000 sq foot building) with two business tenants in place in a growing smaller metro area, which was my first move outside of residential/multi family and office type assets.  Would love to also hear experiences from other commercial industrial investors.

Marco Rodriguez · Answer

I have been a SFR real estate investor for 10+ years and recently became an Industrial Real Estate agent after 25 years in corporate America. "Industrial" sounds daunting but the reality is most industrial spaces are not much more than warehouses and light manufacturing. I am very attracted to this sector because of the potential for low tenant turnover. 3-year leases are the norm here in NE Georgia and most spaces remain occupied for much longer than that.

Our firm focuses exclusively on Industrial properties in Metro Atlanta and we have a database that tracks every building and tenant in this area. Glad to help anyone with data or info.

Brandon Hobbs · Answer

@Will B. I have predominantly been in the storage space for the last 6 years.  Last year we purchased a mixed use business complex with light industrial/office warehouse "flex" spaces in the front of the parcel with road frontage and then boat & rv storage on the rest of the property.  There are 13 small "essential" business tenants in the flex suites each with office spaces and a warehouse with a roll up door.  Tenant base consists of landscapers, HVAC, janitorial service, roofer, dog groomer, etc.  We have really liked the business so far and have decided to add this type of property to our acquisition criteria.  These "dirty job" type businesses in a solid market have proven to be reliable tenants for the most part.  One of the risks we have seen and something to consider - small businesses are small for a reason.  Generally mom and pop owner operators who work really hard and provide great service to the community.  That said they are really good at their trade but not good business people.  They have drama in their personal lives, not good stewards of their cash flow, and can very easily get in a bind if something wrong in their lives or businesses.  You will have to occasionally chase your rent payments and if a tenant skips out in the middle of the night (this has happened to us and certainly will again) you are left with a vacated unit that will likely need to cleaned out and white boxed for the next tenant.  Even with a solid lease, there is very little recourse going after a tenant who just lost everything they had.  With so much uncertainty going into the second half of the year and 2021, I would suggest looking for existing properties that are already eased up and do your DD on the existing rent roll.  Best of luck.

Rob Gillespie · Answer

@Ross Leavitt Would be happy to discuss that with ya. PM me for contact info

Don Konipol · Answer

Courses offered by the CCIM institute

Walid M. · Answer

Denver, CO has been a hot market for industrial over the last few years.  I've invested in five separate properties ranging from 8,000 to 40,000 SQFT and still hold four of those.

For those looking to get into the industrial space, things to consider:

-Zoning & Occupancy.  What is the property currently, and what uses are permitted.  This can be time consuming to get changed if you have a new tenant that needs something different.

-Demising the space.  If you have a space that you intend on leasing to multiple tenants, how easily can it be demised? How will things like loading docks work (will they each have their own? if not how do you ensure happy co-tenancy, etc.)

-Understand your NNN costs, especially on recently acquired spaces.

-Previously mentioned but what drives desirability on tenants end are high ceilings, loading docks, yards, access/location, sprinklered buildings.

Bjorik Mutize · Answer

@Walid M. agreed on all points, and also have been hearing good things about Denver's industrial market. I work the industrial market to your north.

Does anyone have industrial properties?

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