NEWS

Why Industrial Real Estate May be The Next Hot Investment Sector

As we’ve mentioned in the past, not all commercial real estate (CRE) is created equal.

For starters, you have traditional retail spaces like stores, malls, and shopping centers. Those are probably the most common thing that comes to mind when most people think about CRE, Then there are apartment buildings, duplexes, and other multi-family homes, which can be stable investments with appealing cash flow. There’s also office space – a solid investment if you understand the local demographics.

But with each passing year, investors wonder which market segment is poised to lead the next generation of development. We have an eye on one sector in particular: Industrial Real Estate.

New Bridges, New Dams, and New Pipelines

This boom in U.S. industrial real estate was a long time coming, and is likely to stick around a few years before going anywhere.

To be sure, the clichéd stories are at least part true. America’s Industrial Infrastructure isn’t what it used to be. And we really did ship a great deal of our industrial and manufacturing jobs overseas in the midst of globalization and growth-oriented trade agreements.

But in the years since, we haven’t rebuilt our major highways. We haven’t updated our communications infrastructure in ages – leaving us with slower internet speeds and higher overall costs than many other major countries. Simply put, our infrastructure isn’t what it used to be – and it won’t last forever.

The U.S. Federal government has enacted sweeping policies to fund and incentivize new infrastructure building, but it’s a process that will take decades of effort all across the country. That means years of virtually guaranteed business for numerous industrial suppliers – everyone from cement companies to manufacturers of orange safety vests – to feed the country’s hunger for renovation.

Historically, these kinds of industrial investments have been astronomically expensive, but also highly effective. The Hoover Dam, for example, has provided decades of clean energy and fresh water to numerous desert cities (including Las Vegas). Infrastructure can come with a high price tag, but the return on investment is too high to ignore.

At the same time, a number of major American industries are beginning to emerge as new market leaders – from oil companies in the energy sector to biotech suppliers. Providing additional lasting demand in local CRE markets, the emergence of these new industrial leaders only serves to sweeten the opportunity for investors.

The Big Picture: America Needs Industry…

… and for a million different reasons. Consider the following examples.

In Toledo, developers are frantically working on new industrial projects after a Fortune 500 company came to town looking for 500,000 square feet. Toledo couldn’t satisfy such massive demand, so the company went to Michigan instead – a major loss for the former’s local economy.

In Palm Beach County, where an incredible 682,000 square feet worth of industrial space sold in the first quarter alone, brokers are pointing to the consistent rise in prices as a testament to the fact that they aren’t dealing with frenzied buying (a la 2005-2006) but a true economic demand for space. Demand is legitimately soaring, driving prices up by 17% over last year, and supply is basically empty.

Even across the border in Vancouver, businesses are being advised to purchase any real estate they’re currently leasing or renting before prices begin to soar.

The reasons may be different from market to market, but the story is almost always the same: Local businesses are rebounding, growing in earnest, and they need new space to keep the momentum going and to keep growing.

At the same time, soaring land prices have made it prohibitive for developers to build new properties in many markets. But as rents have risen, new construction is beginning to make sense. New available space will allow companies to expand like they’ve been wanting to, and so goes the cycle of industrial CRE growth.

As all these factors combine in 2015 and culminate in the years ahead, look for industrial real estate to enjoy years of soaring prices, growing rents, and perhaps some of the best opportunities you’ll see in a lifetime.