Industrial REITs
These own, run and rent out to tenants space in industrial facilities.
What are Industrial REITs?
Industrial REITs own, run, and rent out to tenants space in industrial facilities. Many focus on certain property types, like warehouses and distribution centers. They also play an important role in e-commerce and help meet the demand for speedy delivery.
These REITs act as last-mile delivery and distribution centers for companies like Amazon, Home Depot, and Walmart.
Industrial REITs need specific real estate to accommodate the transportation and storage of goods. Properties in the industry consist of:
- Light manufacturing facilities.
- Food manufacturing facilities.
- Temperature-controlled warehouses
- Flex warehouse space,
- Logistics properties
Long-term lease agreements, some as long as 25 years, are used to rent out these buildings to tenants.
A triple net lease structure is frequently used to rent out a whole industrial facility to one tenant responsible for paying all maintenance costs, real estate taxes, and building insurance. The agreements guarantee a consistent stream of funds to the REIT.
Different fundamentals and trends influence industrial properties. For example, their effectiveness and physical market cycle are greatly impacted by the growth of the trucking and distribution sector, which was affected by significant changes in the previous ten years.
Key Takeaways
- Industrial Real Estate Investment Trusts invest in manufacturing, production, distribution, research & development, and storage properties.
- All REITs, including Industrial Real Estate Investment Trusts, are governed by a special legal framework that compels them to distribute at least 90% of their taxable revenue as dividends to shareholders.
- Industrial Real Estate Investment Trusts are appealing to investors looking for a chance to get both income and capital appreciation because of this characteristic and the existence of an underlying real asset.
- Industrial property is necessary for transporting commodities across international borders to final customers.
- For the world's manufacturers, distributors, and e-commerce businesses, effective supply chains are ensured by strategically positioned, high-quality buildings with convenient access to transportation networks.
Understanding the industrial rEITs
Manufacturers, merchants, transportation firms, third-party logistics providers, and other businesses with extensive distribution requirements typically lease space from industrial REITs.
Companies like ProLogis have embraced a different approach, seeking to become valued business partners for their customers in an era of change in manufacturing and distribution.
For instance, in the emerging Asian markets, in contrast to industrial developers who had been transaction-focused rather than service-oriented.
Industrial REITs like ProLogis expand their asset base by following their clients into new markets.
These are covered. As a result, invest in rental warehouse buildings as well as other kinds of industrial rental properties.
The capacity and design of industrial buildings are crucial for a building's financial success in industrial real estate market segments, such as distribution or production.
This aspect is more significant for industrial buildings, as opposed to more "standardized products" like office space. Industrial assets must therefore be adaptable to capacity and technological advancements.
They appear more geographically diverse than other REITs, given their nature and the demands of their clients, who require storage, warehouse, and logistic space at many locations.
Investing in Industrial REITs
Such an industry has experienced technology shifts more than other REIT sectors.
These technological changes are related to the transition from complete logistics centers with a particular size, height, and access requirements to relatively small industrial properties that primarily serve as storage or warehouse facilities.
Modern logistics facilities are part of a frequently intricate supply chain, which necessitates a suitable operating system from the Industrial REIT that owns the facility.
ProLogis, for example, provides an organizational structure, operating system, and service delivery system to meet the needs of its customer base, which has grown larger and more active globally.
These have been impacted by the internationalization or globalization of their tenants in this way. As a result, most of its clients now have an international focus and need a local presence in warehousing and logistics.
As a result, a REIT like AMB Properties Corporation has expanded alongside its clients over the past ten years and has greatly internationalized its activities.
Additionally, they could have different property subtypes. Accordingly, several Industrial REITs concentrate on substantial, integrated distribution facilities.
These facilities often serve as processing hubs with a limited storage component and are part of a particular supply chain.
Other REITs, like the Liberty Property Trust, have a portfolio of industrial properties with a broader range of subcategories and a national focus.
This indicates that the portfolio is made up of assets for assembly, light manufacturing, research and development, multi-tenant industrial, and storage.
Risk Factors involved in investing In Industrial REITs
This industry is susceptible to several risk issues. Here is a summary of the most significant ones.
1. Foreign Property Holdings
These frequently have a higher representation of overseas properties because of the features of industrial real estate and the requirement to serve their customers abroad.
Depending on a subset of factors like exchange rates or the development of international real estate markets, this can be both advantageous and detrimental to the profitability of REITs.
The ability of an industrial REIT to pay its shareholders may be impacted by unanticipated changes in foreign regulatory requirements and tax changes.
Additionally, these nations' numerous, sometimes incompatible regulations necessitate extra administrative effort.
2. Environmental risk
Changes or tightening of federal, state, and local legislation may result in considerable expenditures for Industrial Real Estate Investment Trusts, given the shifting attention to environmental hazards.
These changes could have an impact on all REITs, but Industrial Real Estate Investment Trusts are particularly impacted. The removal cost could be high since industrial properties are more likely to incur charges related to the remediation of poisonous and hazardous materials.
The law frequently holds an Industrial REIT liable for the pollution generated by tenants of fabrics or other industrial facilities owned by these businesses, even if the owner is unaware of the problem (an Industrial REIT).
Furthermore, prior tenants may have polluted industrial premises, particularly those in urban and industrial districts. Investors should be aware of this risk because "environmental due diligence" or insurance coverage cannot mitigate it.
3. Operations segments
Several REITs have begun to adopt more intricate structures with various operational parts. In addition, the largest Industrial REIT, ProLogis, has assumed a leading position, complicating the business study.
ProLogis has a development or CDFS component in addition to the "conventional" property activities and an investment management segment. In this fashion,
ProLogis lends real estate to funds with predicted profit levels and access to loan and equity financing.
The dividend-paying capacity of a REIT may be negatively impacted by failure to achieve planned earnings or delays in the development of these assets due, for instance, to changes in the capital market environment or the private real estate markets.
Investors should be mindful of the complex operating components that REITs, like ProLogis, have.
Industrial REITs Types
There are various industrial Real Estate Investment Trusts for each company's demands. Here is a list of the different categories of Industrial Real Estate Investment Trusts.
1. Light manufacturing facilities
They are revenues where companies in the light industry are located. Because they often generate more miniature consumer goods, light industries tend to be less capital-intensive than heavy industries and are more consumer-focused than business-focused.
Instead of serving as intermediaries for other sectors, most light industry items are made for end users.
Facilities related to the light industry often have a lower environmental impact than those connected to heavy industry. Because of this, the light industry is more likely to be allowed close to residential areas under zoning restrictions.
2. A food processing facility
It is a business that produces, packages, labels, or stores food for human consumption. It then sells or distributes that food to other commercial organizations, such as other food restaurants or processing facilities.
3. A temperature-controlled warehouse
It is a storage facility that keeps its temperature within a certain range by heating or cooling the room. To accommodate the needs of products that need to maintain a specific temperature, temperature-regulating equipment is strategically positioned throughout the warehouse.
4. Flex warehouse
The best way to define a flexible warehouse space is as the chameleon of commercial real estate. It is essentially a single-story structure that serves as both a warehouse and an office.
Users of flex warehouses can choose between spaces that are entirely offices and spaces that are a mix of offices and storage facilities. Flex warehouses often have windows on the front of the structure. Some also have loading docks and rooms with overhead doors at the back.
5. The logistics property
It is a hall space for storage, order picking, and product distribution. Although they frequently have a similar layout, each organization uses them differently. The building is different in size from a warehouse but otherwise similar.
Top Industrial REITs
For many firms, industrial REITs are essential. Large retailers and e-commerce enterprises use this kind of real estate investment trust. Here is a list of the Top in the industry.
1. Prologis
Prologis is one of the biggest REITs overall and by far the largest industrial REIT. The corporation has investments by the end of 2021 in almost 4,700 structures with nearly 1 billion square feet of space leased to around 5,800 tenants.
The company operates in 19 countries as part of its worldwide logistics business.
Compared to other industrial Real Estate Investment Trusts with a concentration on logistics, Prologis distinguishes itself apart. It has a global audience, while most competitors focus on the American market.
Prologis has a platform for managing investments, allowing them to generate management fees and rental income.
Last but not least, it has a global development platform, which improves its prospects for expansion. Prologis has grown more quickly over the years than other logistics REITs, thanks to these distinctions.
2. Americold Realty Trust
The first publicly traded REIT that emphasizes cold storage buildings is Americold Realty Trust.
The corporation owned and managed more than 250 temperature-controlled warehouses with a combined storage capacity of more than 1.5 billion cubic feet as of 2022.
Manufacturers, distributors, and food retailers can rent space from Americold in its facilities. Additionally, the REIT administers properties held by other parties and offers transportation services.
Due to its history of acquisitions, Americold has amassed the second-largest portfolio of temperature-controlled warehouses worldwide.
Americold has struggled in recent years due to that strategy's failure. Due to its issues, the corporation decided to name a new CEO in early 2022 to turn things around.
3. STAG Industrial
The industrial real estate portfolio owned by STAG Industrial is varied. Early in 2022, it had over 500 structures with more than 100 million square feet of space, including warehouses, light manufacturing, and flex/office space.
It uses triple net leases to rent out its buildings to solitary tenants. Additionally, STAG has a wide range of tenants, markets, and industries.
STAG differs from other REITs in two ways in addition to its diversity. First, it pays a monthly dividend, making it one of the few REITs that do so.
It currently lacks a development platform. Instead, the REIT expands primarily through the purchase of new properties. It buys many new properties to increase value through leasing, growth, and development potential.
4. Innovative Industrial Properties
Owning specialized industrial facilities leased to state-licensed cannabis businesses is the primary emphasis of Innovative Industrial Properties.
Early in 2022, the business held more than 100 properties totaling 7.9 million square feet spread across 19 states, with 2.4 million square feet still slated for construction or renovation.
The cannabis industry benefits from financial support from Innovative Industrial Properties.
It completes sale-leaseback deals to buy dispensaries, cultivation facilities, processing facilities, manufacturing facilities, and other buildings, which it then leases back to licensed operators, providing them with the money they need to keep growing their businesses.
5. PS Business Parks
As of 2022, PS Business Parks held 97 sites totaling more than 28 million square feet of space in 12 major U.S. markets.
Its holdings are business parks with multi-tenant industrial, flex, and office space. More than 5,000 tenants rent space from it, focusing on giving smaller enterprises the room they need to expand.
PS Business Parks buys industrial buildings to grow. In its current business parks, it will opportunistically create them on non-income-producing land.
Eight hundred flats have been created or built by the corporation at one of its business parks, where multifamily units are also being developed.
Selling lower-growth properties to reinvest the proceeds in more lucrative opportunities is how the REIT finances its expansion.
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