Next to other categories of commercial real estate, industrial properties have seen an increase in demand, following the covid-19 pandemic. E-commerce is booming and production, the supply chain, as well as distribution need to be prepared for these high numbers of sales. Furthermore, every company is to some extent involved in research and development, manufacturing products, distributing them or also just storing their inventory somewhere.
Since this type of real estate is highly important for businesses, we want to share the most common types of industrial property and their benefits.
What is Considered Industrial Real Estate?
Industrial real estate has the purpose to manufacture, produce, research and develop products. Furthermore, it is also used for logistics, as in storing and distributing goods. There are 7 main types of industrial property: Heavy Manufacturing, Light Assembly, Distribution Warehouses, General Warehouses, Truck Terminals, Flex Spaces, and Data Centers.
7 Types of Industrial Property
The following types of industrial real estate are the most common buildings that have been existing for decades. In recent times, new categories have been identified that can complement the list. One popular example of this is the data center.
1 | Heavy Manufacturing
These types of properties are often characterized by their large and customized space. Choosing a heavy manufacturing factory is efficient when the products a company wants to produce require many specific and complex procedures. Equipment that is used is often highly individual and made to the required needs of the business. In addition, a large number of truck loading docks are available to receive raw materials and send out finished goods.
One downside of a heavy manufacturing industrial property is, that if the company decides to sell their asset, it needs to be thoroughly renovated as the new customer may have completely different requirements. Therefore, most of the tenants of these types of buildings stay in them for a long period of time.
2 | Light Assembly
Light Assembly properties are used, as the name suggests, for simple fabrication or rather attachment of materials to create a final product. They do not need as much space as the heavy manufacturing factories since the equipment is more portable and can easily be reconfigured. When the assembly is completed, storage spaces and shipment facilities are also often available.
In comparison to the heavy manufacturing properties, light assembly industrial buildings can easily be rearranged once sold. This reduces the effort of finding a potential buyer.
3 | Distribution Warehouse
The purpose of a distribution warehouse is, to receive goods, store them for a relatively short amount of time and then send them to their next location such as supermarkets, retail stores or final customers. This type of industrial property is usually located close to major cities and in short distance to highways, railway stations, harbours or airports. Distribution warehouses have the main goal of distributing goods, that’s why location is so essential for their success.
4 | General Warehouse
Another type of warehouse is the “general warehouse”. In comparison to the distribution type, it is used to store goods rather than send them away. Once items have arrived at the building, they get deposited in the storage space and do not need to be moved for a relatively long period of time. This also means that less equipment is needed to move goods within the warehouse and the overall structure is more basic. Furthermore, the location factor also does not play as big of a role as it does in the distribution warehouses.
5 | Truck Terminal
A truck terminal takes up less space than any of the other warehouses, as it is not used for storage at all. It essentially is an industrial property that allows goods to be moved from one truck to another. These buildings help to improve logistics as products with a similar or identical destination can be loaded onto the same truck, thus making distribution more efficient.
6 | Flex Space
As the name suggests, flex spaces offer a flexible way of organising a building by including characteristics of industrial, office, and in some cases even retail properties. Common use cases for these types of industrial property are the combination of offices with research and development (R&D) facilities, showrooms or production. R&D allows the business to study and explore new products and technologies while being close to the management and marketing department. With production or showrooms in the same space as offices, businesses that are small or have a low production number can coordinate their tasks more efficiently.
7 | Data Center
One of the more recent types of industrial property is the data center. They are required by many hi-tech companies and must be equipped with very specific hardware and technology. This includes special cooling and ventilation systems, a constant supply of electricity, backup generators and advanced security systems. Data centers are most often very large areas with more than 10,000 m² of floor space and can also be found included in flex spaces.
Pros and Cons of Investing in Industrial Real Estate
Now that it is clear what the different types of industrial real estate are, the question remains: Why should I invest in this sector?
If an investor chooses the right strategy and manages to balance risk, as well as return, industrial properties can be very profitable. Therefore it is necessary to take a close look at the advantages and disadvantages of this asset class. Before making any decisions, analysing the local market and trends is important as there are likely going to be country-wide and even city-wide differences.
Advantages of Investing in Industrial Real Estate
There are a number of advantages that come with investing in industrial real estate.
Compared to offices or residential properties, industrial real estate is very diverse. There are many different types as we explained in this article. Whether it is manufacturing and logistics or data centres and R&D facilities, all of these buildings work very differently. This provides investors with different options, depending on their preferences.
Another advantage is the long-term lease for industrial properties, due to high initial investments and customizations. When a company decides to purchase a manufacturing plant or R&D property, they need to adapt these buildings according to their specifications. Consequently, they will not move to another site quickly as the initial efforts are so significant.
In many property markets around the world, warehouses, manufacturing plants and data centres have shown an increase in demand. One aspect of this trend is the continuous growth in the e-commerce and last-mile delivery sector. Furthermore, also the life sciences industry has seen strong demand over the last few years.
In one of our latest articles, we highlighted the most important industrial property trends for the year 2023.
Often, industrial properties are leased as a so-called “triple net lease”. This means that the tenants of the building are not only paying for rent and utilities, but also for insurance, maintenance, and taxes. For the landlord or investor, this is an advantage, as maintenance and repair costs can be reduced.
Disadvantages of Investing in Industrial Real Estate
While there are certain advantages of investing in this sector, it is also important to consider the downsides. Industrial real estate has a number of risks that need to be addressed before taking any investment decision
One Single Tenant
Large manufacturing facilities or R&D properties are often occupied by one single company only. While this might be an advantage due to easier lease structures, there is a high risk of the building being vacant. If the only tenant decides to leave, rental income will drop to zero and operating costs must be absorbed by the investor.
Many industrial properties are “built-to-suit” (BTS), which means that the building has been designed and constructed in a way to meet the specific requirements of a tenant. For manufacturing or research and development this is often very important, as these sectors need to have the right equipment and facilities directly available
The downside of BTS is to find a new tenant in case the current one leaves. This can take a significant amount of time, depending on the customisation that has been carried out by the previous company.
Lastly, one risk that should not be disregarded is the advancement of technology. When new technologies arrive on the market, older ones are often not efficient enough anymore or too expensive. This is also true for industrial properties.
As a result, certain manufacturing processes might change and thus require redevelopments of the building. In some extreme cases, the entire facility might become obsolete.
Industrial real estate is becoming more important than ever before, with e-commerce expanding faster and the need for efficient distribution systems. Some of the most common types of industrial property are: heavy manufacturing, light assembly, distribution warehouses, general warehouses, truck terminals, flex spaces, and data centers.
If you want to learn more about commercial real estate, smart buildings, smart cities and PropTech, feel free to take a look at our other blog articles.
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