5 Things to Know Before Investing in a Warehouse Space
A warehouse space is a great choice for real estate investors across the board, but there are a few things you should know before diving in.
Among the many options available for investing in real estate, a warehouse space is a unique commercial niche with growing opportunities.
It’s no secret that online shopping has been on the rise for quite some time, especially in the wake of the COVID-19 pandemic. As e-commerce demands continue to tick up, warehouse space is becoming more and more valuable. Consider the projection that Amazon alone is slated to have at least 355 warehouses covering 319 million square feet by 2023.
If you’re an investor searching for more passive income, warehouses may be the ticket. But this is a unique industry that requires a little knowledge and preparation before you dive in. Here are 5 things you should know before investing in a warehouse space.
1. Types of warehouses
As you begin searching for warehouses, it’s important to know the various purposes for which they’re used. This will help you determine the best fit for your interests and financial needs. Here are some of the most common types of warehouses in the U.S.
Distribution centers are typically focused on providing customers with products in a timely manner that ensures quality. These spaces are filled with items for a short time before they’re packaged and shipped to people who are in the surrounding areas. What’s more, many of these warehouses are outfitted with advanced technology because of the need to facilitate processes efficiently.
Manufacturing operations require many different materials, components, and parts. To ensure that assembly or production goes smoothly, manufacturing warehouses nearby must keep these various items in stock. These types of warehouses are often connected to the manufacturing plants themselves for easy transfer.
Small businesses have a unique opportunity to reduce costs by relying on public warehouses. These are typically available on an on-demand basis with flexibility in offerings. Business owners may have the option of monthly terms, as well as per pallet or square footage pricing. This business model is especially ideal for seasonal businesses or those with short-term needs.
Private warehouses are owned by retailers who must store large amounts of inventory and generally want more control and ownership of their processes. Although the costs associated with maintaining a private warehouse are high, the return on investment is often promising for large businesses.
From medicine to perishable food, plants and even cosmetics, a climate-controlled warehouse is designed to protect items that need a cool environment. Many of them also use refrigerated trucks for transport to and from the warehouse.
2. Warehouse design elements
Every warehouse will have different design elements depending on when it was built and what it’s used for. Newer warehouses likely include advanced technology to assist businesses with communication and automation. This can be a huge benefit when it comes to finding tenants.
Although it’s possible to purchase an older warehouse and make the necessary improvements, this usually requires an extensive investment. If you decide to go this route, work with a low-commission real estate agent to at least minimize your purchase costs. This will give you a bigger chunk of change to use when you upgrade the space and optimize it for your desired tenants.
3. Projected ROI
There are two benefits of renting out warehouse space. First, the average lease period is between seven and 10 years. This longevity results in predictable tenant income without the stress of frequent turnover.
Further, the ROI for a warehouse usually comes in at approximately 8-10% annually. A rental property calculator can help you take the guesswork out of a potential deal and determine what your cash flow will look like. Cash on Cash Return (CoC return) is another method of evaluating the money earned on the actual cash you’re investing into a property.
Remember, setting rental rates for your space is an important part of this equation. A rate that is too low won’t yield the cash flow you need, but a rate that is too high will make it difficult to fill vacancies.
4. Location and accessibility
Location is a huge factor when considering whether a warehouse space is a smart investment.
Many e-commerce businesses require close proximity to major highways, big cities, and even railways or airports. It’s also helpful to search for warehouses in logistics parks and other industrial zones. These investments are profitable because they naturally promote an efficient supply chain.
Likewise, the geographical location shouldn’t be so remote that it’s difficult to hire workers. Fulfillment centers and manufacturing centers often require hundreds of employees, providing a boom in local job availability. Knowing that this will be a need, you want to ensure there is demand in the region.
5. Tenant profiles
Your tenants have a significant impact on your ability to be successful in warehouse leasing. Depending on the type of warehouse you invest in, there will be certain types of tenants that are ideal to fill the space. These should be financially stable companies with promising track records and solid projected growth.
In addition, it’s helpful to find tenants with interest in long-term leases. This is usually a win-win for both you and them as it leads to stability.
If there are existing tenants in the space you’re considering, research their operations and the current terms of their lease. Again, the financial health of your tenants will determine your long-term success. If the current tenants are dependable and you can keep them after purchasing the property, this reduces the strain of screening new tenants.
Are Warehouse Spaces Right For My Investment Portfolio?
If you’re interested in building wealth through real estate, warehouses present a unique long-term opportunity. The key is to diversify your portfolio and be patient. Although real estate always requires some level of risk, the rewards can be great if you do your homework and make careful choices.
If you’re unsure about a particular investment opportunity, seek out a trusted financial adviser to help you analyze the details. In addition, a realtor with affordable commission fees will help you keep more money in your pocket during the transaction.
Luke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.