Industrial property is the entry point for many property investors to the commercial property industry. As a property type, industrial property is relatively straightforward with little complexity. The property owner needs to target and strategize the following issues when looking for a property to buy:
- Stable tenants
- Achievable rentals
- Good property location
- Industrial property precinct
- Growth of the local community and business sector
- Vibrant industrial community supplying services, products, and raw materials
- Access to transport links, ports, airports, and railheads
- So now, let’s look at the industrial property needed today by tenants.
What do Industrial Tenants Need?
Traditional warehouses will include quality height, size, loading and unloading facilities, quality office space to support industrial operations, ample car parking for staff and customers, hardstand areas for operational flexibility, and high levels of security to protect the tenant’s goods their operation.
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Industrial tenants today are far more sophisticated and demanding when selecting a property to lease or buy. Therefore, the investor should select a property that has all the elements of property usage that tenants expect in the local market. Tenants know that the property will impact operational costs and eventually the bottom line of their business. Tenants will choose their property well as a consequence.
Taking the First Step to Investment in Industrial Property
Industrial warehouses are simple to construct and have a long economic life; hence, the investor sees them as popular entry-level investment vehicles. Providing they select a sound and strong tenant and apply a good lease, the stable future of the property for investors is normally achievable.
There is very little management required on industrial property, and as a direct result, many private investors will manage the industrial property themselves. Unfortunately, this does have negative connotations. The first-time investor sometimes has little awareness of the specialist terms and operational conditions supported by lease documentation on their property.
These first-time investors can then overlook critical matters and make mistakes. It is easy for the experienced commercial property specialist and commercial real estate agent to see these ‘first-time’ landlord-managed properties as you drive through a town or city. The errors of ownership are visually obvious. These errors can even reflect in the ultimate levels of rent and price on the property.
Invariably and importantly, this self-management problem will surface at final sale or rent review time when the investor has overlooked something or transacted it incorrectly. The buyers of property today will conduct a due diligence period and investigation of any property before settlement.
Those property owners that manage their own investments should only do so only when and if they completely understand the complexity of the task at hand. If the investors only have a basic understanding of property performance and function, they should not self-manage the property. The matter is plain and simple.
Critical property knowledge will involve key functional elements such as:
- Types of rental
- The lease clauses and provisions
- Property maintenance strategies
- Property operational costs
- Contractor management
- Vacancy resolution and strategy
- Incentive use and strategy
- Tenant negotiation skills
A good property solicitor is invaluable when it comes to Investment Property. The same should be said for a property-experienced accountant. Even the most basic industrial property needs carefully prepared lease documentation and financial guidance. It is interesting to note that many first-time property investors will sometimes choose cheaper lease documentation that is ‘generic’ and available off the shelf. Cheap is not a good option when it comes to documentation in investment property. You get what you pay for, and so why would you take this risk?
Given that you are endeavoring to protect and stabilize cash flow, a few dollars saved on lease documentation preparation at the start of any occupancy can eventually lead to property instability or downfall, loss of tenant, higher property operational costs, and uncertainty when it comes to exercising the critical terms and conditions of the document of the lease.
A good property solicitor will understand the occupancy needs of the particular property and reflect that into the document used by the landlord to protect occupancy and cash flow. The same solicitor can create a standard lease document and strategy that targets the landlord’s cash flow plans and investment targets. You will not get this advantage from ‘generic’ leases.
Industrial Properties Outgoings Advantage
Many investors seek to purchase and lease industrial property to major industrial businesses under long-term net leases. In long-term net leases, these larger tenants would normally control and pay the property outgoings direct.
The property outgoings in industrial property are normally simple. However, an essential checking process is needed here to see that the tenant is correctly paying the outgoings in a timely fashion. In many circumstances and this market, we have seen some tenants avoid the payment of outgoings without the full awareness of the landlord. This then creates unnecessary fines and legal disputes for outstanding outgoings accounts. The landlord must not assume that the tenant has discharged or paid the outgoings; the landlord can later find that the matter is still outstanding and about to go to court for non-payment. Rates and taxes (statutory charges) are usually a charge on the land and will ultimately fall on the landlord for payment.
So whilst this process of the tenant paying outgoings direct is convenient and simple for the landlord, such leases have little substantial increase in rental return, which may not necessarily support the investor’s growth plans. Investors of this ‘basic’ nature typically hold several properties of this type over the long term to allow them to achieve portfolio growth.
The industrial property pays to recognize that the property may be uniquely and especially suited to a particular tenant. This means that the vacancy threat in the industrial property must be carefully monitored as any lease reaches the end of the term. It is not unusual for an industrial property to remain vacant for a lengthy period in the current market.
Mortgage Lenders and Industrial Property
Mortgage lenders for fully leased warehouses on long leases see them as good collateral for loans. Long-term financing is typically available for industrial investors at competitive interest rates. The industrial investors probably find it easy to refinance an expanding portfolio on the back of their established industrial and well-leased property.
The secret to success in industrial property investment is to have:
- Good leases
- Good tenants
- Good vacancy awareness and minimization strategies
- Sound recovery of property operational costs
- Good maintenance controls
- Good insurance strategies
- Minimal exposure to risk from the property
- Well established permitted use and compliances
- Good income and expenditure budgets
Industrial property is the market segment that is normally suffering early in an economic downturn. That is due to the close integration between the industrial business community and the consumer. Fortunately, the industrial property market responds quickly when the economy moves towards growth and stability. Landlords should respect this fact and monitor their way through the downtimes as they will always come and go.
Investment Property is cyclical and will, on average, move through a complete cycle every 7 to 10 years. Many investors know that real opportunity exists today at the beginning of a new property cycle in today’s market. This cycle is currently evident in most countries and major cities.
John Highman is a prominent investment real estate speaker and coach who helps real estate agents and brokers globally improve their commercial real estate market share and performance. He himself is a successful real estate agent that has specialized in commercial, industrial, and retail real estate of all types for over 30+ years.