I haven't worked on many industrial deals so I'm hoping you all can help me really understand the basics. Some questions that I have are:
- What ceiling heights are considered the best? What heights are used for different types of purposes?
- What are the different types of industrial uses? Are there significant differences in cap rates between these?
- What are the key drivers in rental rates between buildings that are essentially next to each other? What ranking would you give different drivers?
These are just the first questions I've come up with. If I missed what's important, please tell me that as well.
Pretty much all the leases in industrial are NNN. The typical expenses you're going to underwritten are taxes, insurance, CAM, and a management fee. With regards to expenses, the typical negotiating points are going to be based around capital expenses.
While industrial is known for being a non-capital intensive asset class, the asset class is more of a "death by 12 ga to brain" rather than "death by a thousand cuts". When there are no capital expenses, you're raking in cash, and when there are capital expenses you better be prepared for a big bill. Roofs are extremely expensive. It is not uncommon to pay $3MM+ for a new roof. Market is that the owner is responsible for the roof. HVAC is also a big expense, and it is fairly common to see the owner responsible for it. Generally speaking, the structural/building envelope is the responsibility of the landlord, and the interior is going to be on the tenant. Absolute NNN leases are also not uncommon in industrial, and are literally just mailbox money.
To all you asset management/leasing folks out there: you want to kill the value of an industrial building? Lease it long-term with no rent escalations. It will destroy literally any hope of building value appreciation during the lease term, and you'll get eaten alive by inflation. It creates an amazing value-add opportunity when the lease rolls to market though.
Clear Height is mainly size dependent. Almost all new development in my market (Phoenix) above 300k SF is 36' and up, there are several spec 40' clear buildings. In the mid bay sized buildings I would not go less than 32'. On new construction, it is approximately $1 per clear foot between 28' and 32' and 32' and 36', which in the grand scheme of things is a small price to pay to ensure that the asset is not left off any lists, either by an occupier or at capital market disposition.
Warehouse/Distribution, Manufacturing and 3PL are the main industrial use types. Cap rates are most dependent on tenant creditworthiness and in place rental rates compared to market. That said, buildings that are highly functional with low re-tenanting costs will have a better chance of achieving higher sale price per foot compared to a tenant specific building, which will affect cap rates.
FUNCTIONALITY. Clear height, truck court depths (180' plus is becoming standard), separate truck queuing lanes, car parking, distance to freeway/highway systems all play a large part in rental rate discrepancies in the same submarket.
I made a post about 4 months ago that had a file with pretty much all the information you could ever want about industrial (see link below).
https://www.wallstreetoasis.com/forums/everything-you-could-ever-want-t…
Ceiling heights are going to depend on the building type and the designed use. The standard for a class-A bulk building nowadays is at least 32' clear, with the preference being 36'-40' clear. 24'-28' clear is okay for a shallow bay building, but the preference is definitely going to be at least 28' clear. 28'-32' clear is good for a regional distribution center. If an industrial developer builds a tilt-up building under 28' clear today then they should probably fire their architect and go back to doing grocery anchored shopping centers. As mentioned above, the cost for more height is such a relatively small cost that there is zero excuse.
There are literally thousands of different industrial uses, but in my opinion you can really narrow down the real estate to 5 types. Bulk distribution, regional distribution, shallow-bay/multi-tenant, flex, and manufacturing. Flex/manufacturing are going to trade at higher cap-rates than the more generic distribution/shallow bay product. Investors are just less interested in the risk associated with retenanting a flex building with an expensive office buildout, or a super specialized manufacturing facility.
There are a lot of different drivers in rental rates between buildings. One of the big ones in industrial is tax abatements. If you can save big bucks on your property taxes, then you can be more competitive at the same rate, or equally competitive at a higher rate, since tax costs are passed through to the tenant. Other drivers are the functionality of the buildings (truck courts, dock doors, power, column spacing, clear height, slab thickness, etc), operational efficiency that impacts OpEx (different types of lights/HVAC), access to main arterial roads, and TI packages. OpEx is a big one since all those costs are passed through to the tenant. A relatively new development is that tenants care much more about the aesthetic of industrial buildings.
As I mentioned above in a separate comment, roofs are an incredible important part of successfully underwriting an industrial deal. They are by far the largest capital cost you will run into. Just for a general rule of thumb, the average lifespan of a EPDM or TPO roof is 18-20 years. Anything past that is borrowed time and you should always assume it needs to be replaced immediately.
Feel free to ask anymore questions. I work in industrial acquisitions and literally do this shit all day long for 60 hours a week. In the past 6 months I've probably underwritten $5BN+ of industrial real estate and seen practically every deal that has come to market that is not in the Northeast or California.