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.
What are the typical lease structures? NNN? Modified gross? I know it varies and depends on the property.
Also - how do you value these properties? Any typical expenses one would come across? Is this more or less similar to NNN retail?
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.
What up yeti. Great to see you around.
If industrial spaces are “NNN” - I know there’s a lot of semantics about this term - then the owner of the property isn’t paying any expenses correct?
The taxes, insurance and CAM are all reimbursed by the tenant?
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.
Thanks. This is really helpful. Is it common to see different rental rates between warehouse/distribution, manufacturing, and 3PL facilities? If so, can you discuss what general ranges seem reasonable?
Warehouse/Distribution and Cross-Docks (what you call a 3PL facility) are going to have slightly different rates, with the higher rates leaning towards the cross-docks. Ranges are going to vary pretty dramatically by market/vintage/size, but I'd say anywhere between $3.50/sf to $6.00/sf is generally what you're going to see in most markets. There are certain markets where the rents are substantially higher (such as Austin or Inland Empire).
I just worked on an industrial deal and the main points that were highlighted were new spec buildings are 40', where columns are spaced inside the building is important, the power/electrical of the building, and one really important thing pointed out to me by our brokers was the ESFR sprinkler system (compared to just a wet system).
ESFR has been industry standard since the last cycle. I am not aware of any new buildings built in the past 5-10 years that have not included ESFR.
Can you explain what ESFR is?
I believe the above covers it all pretty much. Some other items that may affect two buildings next to each other are ability to easily build out TI, ability to fully secure truck courts, expansion capability, number of access points to public ROW, condition of roof (major cap ex on these buildings), power availability for heavy manufacturing or ecommerce uses, use restrictions by City.
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.
Thank you. This is great information. Can you explain what EPDM and TPO roofs are?
http://lmgtfy.com/?q=Epdm+roof+vs+tpo+roof
EPDM is a rubber membrane that is made from materials not dissimilar from your car tires. It is laid down on top of the decking in sheets, and is joined together by welding it. Big key here is that it does not form a monolithic roof and it has significant worse dimensional stability when compared to TPO. It can be affixed to the decking either mechanically, or by placing a ballasted (rocks) on top to hold it in place. EPDM roofs are typically black, but can come it other colors such as white (for extra cost). Due to their color, they tend to cause the building to conduct more heat from the sun.
TPO is a plastic/rubber composite that is similar to PVC. It is also laid down in sheets, but roofers use heat guns to weld the sheets together. This will form a monolithic sheet, which has many upsides when compared to EPDM. TPO roofs are typically white, but can come in a wide variety of colors. I've seen them red, green, blue, etc. Because they roofs are white, they tend to have the opposite effect of a EPDM, and they tend to reflect more heat away from the building.
In general, TPO is the go to material for new construction. There isn't a large cost difference between the two, and TPO generally is a better membrane. There are situations where you'll see a EPDM roof, such as cold climates where they want keep the building warmer with a black roof.
Bringing this back for some help...
Who are the biggest GP's and LP's in industrial right now? It looks like there are a lot of REITs, the returns look to fit their cost of capital which makes sense. Obviously Blackstone has purchased a ton, but how exactly are they structured; do they play the role of GP and LP?
If you have big equity players in the space using 1 company as the operator, how does the landscape for GPs look like vs something like multi fam? any thoughts are highly appreciated.
Quaerat itaque quas corrupti repellat magnam. Molestias unde veritatis deleniti voluptas itaque sed. Porro cum nobis quia. Nostrum culpa cupiditate odio dolorem dolor ab. Ipsa vel accusamus atque corporis dolorum quidem quia.
Doloribus laudantium eum aut in deleniti sit et. Qui placeat qui ipsum iusto dignissimos earum. Magni repellendus impedit nulla beatae. Est molestiae autem accusamus voluptas nam deserunt.
Natus molestiae non labore. Illo suscipit sit dignissimos quam. Nemo qui corrupti debitis sed rem enim odit exercitationem.
Ut atque eos cum dolore. Ut aut dolore nihil placeat eaque. Error asperiores in aut velit ut doloribus possimus. Atque tempora voluptatibus in expedita soluta consequatur quae.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...