I'm considering multi-tenant industrial. What do I need to know?

Question

My dad and I have done a fair amount of student-oriented multifamily. We need to put money into new construction in an opportunity zone (from the recent tax law), and are considering diversifying into multi-tenant industrial. We've interviewed a couple brokers that came well-recommended, but I still want to do my own research about what it's like to own this kind of real estate long-term. Out of all the RE investing material I've read and listened to, I don't remember industrial ever being mentioned.

So, does anyone have educational resources they would recommend? Has anyone owned this kind of property? What has your experience been? Thanks so much!

So, does anyone have educational resources they would recommend? Has anyone owned this kind of property? What has your experience been? Thanks so much!

Ronald Rohde · Answer

It all comes down to location, if you know your local market, then you can cherry pick locations on the border or room for growth managing a rougher tenant base. I think it may be interesting how to "sin" restrictions come into play. No alcohol, gambling, massage or suntanning facilities, but everything else is fair game.

Greg Dickerson · Answer

Ross - see answers below,

How would you come up with a long-term vacancy factor?

Depends on the size of the building and how many spaces you have as well as market demand.

Larger tenants are always NNN, but does that equation change when you're carving up the space more and more for smaller tenants? No. the smaller tenants will be NNN as well. You bill on pro-rata share or meter the spaces separately depending on the size and type of building. You have the most flexibility on ground up as apposed to carving up an existing building.

As the rented space shrinks, do you get more rent per foot at some point? (I.e., with multifamily the smaller the unit, the more rent per foot generally.) As a general rule yes the smaller the space the more you can charge but its all about demand in your market and competition.

With our multifamily, vacancy has been predictable and low. And with so many units, if something causes a unit to sit vacant for a while, it's a small percentage of the portfolio. If we get into flex industrial, there are going to be fewer tenants, and we're more nervous about taking more time to re-tenant a unit, especially with fewer total units. How do you mitigate this risk? Again this all depends on the size of the building and how many spaces you have and the demand for those spaces. I would not do a project like this unless there was a strong demand for it or if you can get a really good price on a vacant building.

Ronald Rohde · Answer

Do you have land already controlled? OZ compliance just came out so be sure to have contracts and timelines in order. I'm doing a lot of opportunity zone work for existing clients.

Greg Dickerson · Answer

Yes these are great assets to own. They are also referred to as Flex-space. You essentially carve up a large industrial building per tenant usage request as you go. You could convert to storage, or You can also subdivide the space in advance depending on your market and the demand.  I have also done them where it's a complete open concept for small startups, artists, and moving companies that need staging space. I would be happy to discuss further. Feel free to reach out.

Ross Leavitt · Answer

Thanks for your input @Greg Dickerson and @Ronald Rohde. I think what I'm getting is that industrial is more variable from one local market to another. So we'll just continue to ask our broker lots of questions. Thanks again!

Ross Leavitt · Answer

@Ronald Rohde we are looking at general areas but haven't started shopping for land yet, since we're still deciding whether to go multifamily or flex industrial.

What OZ areas do you think are the most promising? Of course we're looking for that unicorn OZ that is not currently depressed and still has room for more economic expansion.

Ross Leavitt · Answer

@Greg Dickerson thanks so much for chiming in. This kind of property is just what we had in mind. We're trying to put together our own pro forma to compare the project with our typical multifamily development.

How would you come up with a long-term vacancy factor?

Larger tenants are always NNN, but does that equation change when you're carving up the space more and more for smaller tenants?

As the rented space shrinks, do you get more rent per foot at some point? (I.e., with multifamily the smaller the unit, the more rent per foot generally.)

With our multifamily, vacancy has been predictable and low. And with so many units, if something causes a unit to sit vacant for a while, it's a small percentage of the portfolio. If we get into flex industrial, there are going to be fewer tenants, and we're more nervous about taking more time to re-tenant a unit, especially with fewer total units. How do you mitigate this risk?

I guess these are the kinds of specific questions I should have posted initially, but thanks so much for your help. Oh, and if you know of anywhere else where someone has answered these basic questions already, I'd love to be directed there!

Ross Leavitt · Answer

@Jay Hinrichs, since you've done everything, could you share some tidbit from your experience with multi-tenant industrial?

I'm considering multi-tenant industrial. What do I need to know?

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