Discover the increase in demand for industrial real estate

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Investors who wish to invest in industrial real estate must have an idea of ​​the utility of the investment in their portfolio. There are many factors to consider, ranging from upgrading and selling the property to finding a long-term tenant, or if the investor is looking to occupy the property as a tenant.

Wealth Migrate believes that the sustainability of an investment is important, especially since industrial real estate tends to be a long-term asset that investors hold to generate income or to increase the value of the property. The durability of an industrial asset will hold an investor in good stead if one is considering selling the asset or holding it to generate passive income.

Factors to Consider When Investing in Industrial Real Estate

As mentioned in our previous article on E-commerce and logistics causing an increase in demand for this type of propertyConsideration should be given to the convenience of a good transport network, infrastructure, potential redevelopment and whether the property could provide a mix of office and industrial buildings to increase its profitability. Flexibility is a key factor for investors who want to get the most out of industrial real estate investments.[1]

This adds an additional diversification benefit to an investment portfolio, as industrial property is often a hybrid of the two and ensures that the property is more attractive to a wider target market if it is multifunctional. Zoning restrictions on the land and buildings will contribute to the possibility of it being redeveloped in the future, it is important that investors have a clear idea of ​​what this entails and what regulations apply to this area.[2] Especially regarding the permits granted and the permits they will need to convert it into different spaces for offices, storage, cold storage, data centers, etc.

The good news is that industrial tenants tend to sign longer leases because the types of buildings and land needed mean that tenants often build specific facilities on the premises. These types of leases are typically three to 10 years, and even longer with lease renewal rights. Wealth Migrate argues for the certainty that such contracts provide, as investors can then determine the income potential of industrial property by the parties involved, their credit history (in the event of default), the income that will be generated, and even consider the nature of the tenant’s business and whether it is likely to remain in operation for the term of the lease.

Uncertain markets faced with the growth of e-commerce and logistics

As e-commerce expands and demand increases for transportation networks, which are critical to supply chains to ensure that not only are goods produced and manufactured in good order, but delivered to distribution and down the chain to the consumer is faster and more convenient. Post-COVID-19, commercial real estate has seen a record surge in investment, but even as it picks up momentum, investors continue to carefully scrutinize the current uncertainty in the market. There is still a shortage in the supply chains due to the war with Russia and Ukraine, and the added challenges of inflation and higher interest rates.[3]

The solid fundamentals of industrial real estate

The industrial property sector has received a boost from the pandemic, even though these fundamentals were largely already in play before COVID-19.

Some of the strong fundamentals include:[4]

  1. An incessant demand for the storage and rental of goods.
  2. The rapid increase in online shopping and tenant concerns over supply chain shortages, resulting in a need for more warehouse space for additional inventory.
  3. Other trends driving industrial acquisitions include barriers to new development in certain markets, population growth and rising construction costs.

Industrial deals have captured global attention, such as Stockbridge Capital Group’s partnership with Seoul’s National Pension Service to acquire a $2 billion (USD) US-based industrial property portfolio with 14.3 million square feet and including tenants like Amazon, Walmart and Target.[5] The spotlight is currently on industrial real estate as KRR & Co, a global investment firm, closes a deal for around 100 warehouses for an estimated $800 million (USD).[6]

Since the pandemic, the safety net of investing in hotels, offices and retail has largely shifted to industrial real estate, especially since e-commerce has grown quite significantly during and after COVID-19. This rise in foreign investment is also due to so-called “scale opportunities”.[7] Large industrial portfolios offer a lot of capital all at once, and investors see an opportunity to buy in low-yielding markets as barriers will continue to drive up the price of rentals – from government laws and restrictions and limited land – reducing the types of properties available for e-commerce and logistics.[8]

The attractiveness of industrial real estate for ultra-high net worth investors and foreign entities as a safe bet

In the race for space, logistics becomes a reference in terms of investment because demand cannot keep up with supply. There is a lot of construction and new storage space being built, but the demand now far outstrips the supply.

According to JLL, this supply shortage is less than 5% of vacancy levels for most major logistics markets.[9] While the usual types of investors play in this market, such as REITs, pension funds, insurance companies and private equity firms,[10] Ultra-wealthy investors and foreign entities have taken note of this increased activity and are also investing in industrial real estate as a safe bet.

It should be noted that prime buyers aim for an average internal rate of return (IRR) of 5% to 6%, while value-add investors seek an IRR of 8% or more.[11] In this regard, Wealth Migrate offers investors an IRR above the market average. Wealth Migrate’s latest industrial investment offered a net IRR of 17.7%, a deal that was quickly fully funded.

Wealth Migrate can deliver these types of returns to investors through a partnership with DWG Capital Partners (DWG). Judd Dunning as President of DWG specializes in “provide institutional-level strategic advisory services for stabilized, value-added and distressed retail, office, industrial, multi-family and development assets”.[12] Fully funded industrial real estate investment featured a sale-leaseback structure – a business transaction in which an owner and occupant sell their property and then lease it as a tenant to the new owner. This creates a stable, long-term asset that produces rental income for the new owner, which becomes a passive monthly cash flow for investors.

As part of an ongoing educational series, our next article will explore the realities of living 100 and how investors should go about creating and protecting their wealth with this increased longevity in mind.

Find more Wealth Migrate content:

Read our investing articles and listen to the podcasts. We cover the themes of diversification, structured notes, tailor-made co-living and industrial real estate. Click on here for the full list of Wealth Migrate content.

[1] Guest writer. (January 2018). “Understanding the different types of industrial property”. Extract of Savills.

[2] JLL. (September 2020). ‘How to approach an investment in industrial property’. Extract of JLL.

[3] Botwinick, R. (March 2021). “Industrial real estate is a safe haven in these uncertain times”. Extract of Forbes.

[4] JLL. (May 2022). “Real estate investment hits record high as headwinds emerge.” Extract of JLL.

[5] Stanton, R. (December 2020). “NPS and Stockbridge form new joint venture in industrial real estate”. Extract of business thread.

[6] Bloomberg. (December 2020). “KKR nears $800 million US warehouse deal with booming e-commerce.” Extract of business time.

[7] JLL. (May 2022). “Real estate investment hits record high as headwinds emerge.” Extract of JLL.

[8] Harmse, N., and Robson, W. (March 2021). “What drove real estate returns in 2021?”. Extract of MSCI.

[9] JLL. (September 2020). ‘How to approach an investment in industrial property’. Extract of JLL.

[10] Harmse, N., and Robson, W. (March 2021). “What drove real estate returns in 2021?”. Extract of MSCI.

[11] Kirk, P. (December 2020). “Every type of investor is looking for industrial properties in the United States”. Extract of wealth

[12] DWG Capital Partners. (2021). ‘Our team’. Extract of DWG Capital Partners.

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