Benefits of Owning Industrial Property

Office and retail space generally are seen as more desirable, high-end property compared to industrial commercial space. However, there are benefits of owning and managing buildings in an industrial zone that you may not have considered.

Simple to Own, Manage
Thomas R. Sestanovich, a founding partner and head of real estate at Moldo Davidson Fraioli Seror & Sestanovich LLP in Los Angeles, says industrial property is usually in an area that is architecturally and geographically less desirable than office and retail space, but can be advantageous because tenants and their issues can be simpler to manage.

“The incentive for a management company to own an industrial facility is that it’s simpler to operate and maintain,” he says. “The buildings are less glamorous, built very simply. It’s not an office building with a lot of glass or a retail facility with heavy customer traffic and a lot of retail turnover. And if you have a single tenant it’s very simple to have a relationship with that tenant.”

Depending on your market, industrial leases can be triple-net leases: where the tenant is responsible for all costs of the interior and exterior premises. However, the owner/manager usually will take responsibility for the structural exterior, such as the roof and outside structure, and sometimes parking areas when needed, he says. The tenant maintains his own insurance payments, property taxes and other expenses. Owners, however, are wise to keep their own insurance for at least property damage, and then pass on the cost to tenants, he advises.

“The management company’s job is much simpler than retail of office spaces,” Sestanovich says. “All they have to do is make sure the outside of the building is in good shape. Industrial projects, because they’re usually just single-tenant, are pretty simple for a management company to work from and maintain. In fact, it’s probably one of the simplest management company jobs.”

Payman Emamian, founder of Premier Realty in Los Angeles, agrees. “There isn’t a lot of infrastructure,” he says. “You don’t have to maintain a whole lot of other systems. The maintenance is low; with office and retail you have so much to maintain.”

It’s a source of passive income; you’re creating an asset that is both growing and providing income, Emamian says. “That’s what you’re trying to do, you’re trying to purchase assets that you can add value to, manage them and create an income source as well as value that will continue to appreciate,” he says.

Emamian thinks industrial space is a good investment now because he is beginning to see small-strip industrial centers in southern California that, for the most part, are all leased. He adds that there is an enormous demand growing rapidly, especially from small businesses, creative businesses—everyone is getting turned on to industrial spaces. “You cannot find a lease space in a lot of the ones we have around here,” he says.

Emamian says you’re dealing with small- to mid-size corporations that need industrial space, and a lot of businesses are finding that they can turn big industrial warehouses into loft work environments. “In urban environments, industrial space is kind of a chameleon, it can turn into anything you need it to,” he says. “Now’s a great time to own industrial space. Small business is on the growth, industrial space can go any which way you need it to.”

Buyer Beware
There are some potential drawbacks to consider, though. Although it can be beneficial dealing with only one tenant, if that tenant leaves or goes out of business, it can cause a major shortfall for your business. “If you have one big warehouse and you have a large lease to a corporation, should that corporation at any point go under, you’ll have a huge albatross on your hands,” Emamian says.

Economic forces have a gigantic impact on industrial property, more so than retail or office space, Emamian says. It’s completely out of your hands. Even if demand for industrial space has grown recently, there’s nothing to say that all of a sudden things aren’t going to change. If you have tax incentives to bring business to a local area and there is a shift in local government, you could lose those tax incentives, thus, losing the businesses that potentially want to come to the area—leaving you with a large vacancy for a long time.

“It depends on what’s happening in the industry, what’s happening in every state,” he says. “Are there economic forces in effect that are trying to generate more business for that state? Is that state supportive of small business? If things change—governments change—that could affect industrial space greatly.”

Emamian also warns that you better know your potential tenant base. If you buy property on speculation, you could end up losing everything. “That is the biggest thing in owning industrial space,” he says. “You’ve got to know what the demand for the area is and vacancy factors and what’s available. My recommendation is try and find large corporations. You always want to have a national tenant, a big name—someone who has credit so that you are guaranteed something. If you don’t, you’re always kind of playing Russian roulette.”

But as with all real estate, it is a gamble. If you find and keep a reputable tenant in a desirable property, it is always a recipe for financial success until it isn’t. Change is constant, so knowing when to take advantage of opportunities is key.

“To the extent that you could find a credit tenant in a good growing area where there’s not a lot of vacancy, it’s one of the most attractive properties to own,” Sestanovich says.