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Real Estate

Industrial Real Estate: Investing in Warehouse Development

Typically, when we think about real estate investing the focus is multi-family or single-family residents used as rentals to create cash flow. However, there are numerous property types to invest in and, whether looking for a place to live, work, or shop, property and structures are needed.

The earth contains approximately 15 billion acres of habitable land, of which only 1.5 percent currently has a human footprint. That small number is likely because, historically, there has been little change in the use of land. Take farmland for example, though the structures may change the land is still used for farming. Recently however, there has been a paradigm shift and we are seeing more changes in land use as well as to the structures being built.

The Growing Need for Warehouses

A property type I knew very little about was Industrial, that was until my son became a commercial broker specializing in the acquisition of land to develop warehouse/distribution/fulfillment and manufacturing facilities. We all know what a warehouse is, but do we really understand how the building and investment are managed?  The warehouse landscape has changed over the years, most specifically as it relates to retail sales. In the past, all goods were trucked to a distribution warehouse where they were then sent out to retail stores and subsequently sold. With the explosion of eCommerce, which has more than doubled market share in a decade (see below), warehouse uses have expanded.

e-commerce as a percentage of retail sales bar chart.

Today, there is a growing need for a different kind of warehouse facility, where goods can be stored and individual orders processed. These kinds of warehouses are called fulfillment centers. One of the data points that clearly shows this trend is the number and size of new warehouses built since 1990. Over forty-six percent of all warehouses in the US have been built since the ’90s, and their size varies from 25,000-100,000 square feet (there are also some larger, of course). This is a massive increase from four decades ago when the average warehouse was only 10,000 square feet.

4 Important Factors When Investing in Warehouses

We will focus on four critical items as they relate to investing in industrial real estate and specifically warehouses:

  1. What makes the right location for a fulfillment warehouse?
  2. What are the benefits to communities to have a fulfillment warehouse?
  3. What’s the time-frame for development of a fulfillment warehouse?
  4. How can individuals invest in fulfillment warehouses?

Choosing a Location for a Fulfillment Warehouse

Free Real Estate Investing WorkshopThere are a few key things to consider when choosing a location for distribution and fulfillment warehouses. Access to a major freeway, preferably where several freeways intersect headed in various directions is a must. Additionally, because large trucks will be coming and going with various shipments of items, a large parcel of land is required. For example, if you wanted to build a 100,000 sq ft building, you’d need about 145,000 sq ft of land or 3 1/3 acres. Often several pieces of land need to be combined to accommodate this size lot; this process is called assemblage. Zoning and environmental concerns also need to be taken under consideration. Often these parcels of land need to be rezoned, and within the rezoning process, environmental concerns and issues may arise.

What Benefits do Warehouses Bring to a Community?

Distribution and fulfillment centers are typically a benefit to the communities they are housed in or adjacent to for several reasons such as:

  • Employment – even though there is more automation happening in these centers – there is still a need for employees of all levels.
  • Taxes – since a fulfillment center is the point of sale, it generates tax revenue for the community it is housed in.
  • Community improvements – often, a developer will be required to add to the community’s infrastructure such as building or improving roads, parks, etc.

How Long Does it Take to Develop a Fulfillment Warehouse?

A typical development can take from 3 to 5 years depending on a few factors. It breaks down like this:

  • Acquiring the land (the ideal site is often not listed, so typically a broker has to put the deal or deals (assemblage) together which could take anywhere from 6 months to years.
  • If no extra work needs to be done regarding zoning, the building can start and takes approximately 8 months if all goes according to plan.
  • Ideally, agents have been working on filling the center with potential tenants throughout the building process. The leasing process can take six months or longer.
  • Tenants then have 2-3 months to make tenant improvements (TI)
  • Leases typically last from 5 to 10 years.

How to Participate in Warehouse Development

The easiest way to take part in a warehouse development investment is to own the land a developer wants to build a facility on. There is typically a sizeable profit potential for the landowner.

Another option is to purchase shares of a REIT (Real Estate Investment Trust) of a company like ProLogis.  ProLogis is the largest international developer with 3,771 buildings that total 786 million square feet.

Interested parties could also invest in privately-held REIT such as Black Creek Group or, for smaller projects, they could create or join a Real Estate Limited Partnerships (RELP).

Shout out to my son Austin Hill – Senior VP for Lee and Associates in Ontario, CA, who was patient with his mother asking all kinds of questions about his industry so you could get an insight into this sector and also allowed me, Austin’s mom, to learn more about what her baby boy does.

Good Fortune,

Diana D. Hill – Diana@OTARealEstate.com

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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