Industrial Real Estate

From Industry Outcast to Investor Darling

When I originally started my blog, my goal was to write about all things real estate, and dive deep into how the industry intersected with technology to improve user experience, efficiencies, and disruption.  Most of my focus to this point has been on residential and office, but I received a handful of requests to write about industrial real estate.  My knowledge of industrial real estate was nonexistent, so I used the last week to speak with as many experts in the field as I possibly could.  I came away with the perspective that industrial real estate, which was once considered to be an outcast, has transformed into quite possibly the hottest segment in the industry.

No Supply

There is a striking similarity between industrial real estate and the current housing market:  there is no inventory, and listings are king.  According to Ben Spinner, a top producing senior associate at Marcus & Millichap in Los Angeles, “As soon as a listing goes live, assuming it is priced correctly, it is not uncommon for a dozen offers to come in right away.  Investors that were primarily focused on NET lease purchases and multi-fam have started to diversify into industrial in a big way, which helped to drive demand well above supply”.

Another reason why industrial is so hot right now, according to Mike McGraw, financial analyst at Industrial Realty Group, is due to ecommerce.  “As more and more people turn to purchasing their goods online and they expect those goods to be shipped to their homes, there has been a growing need for industrial real estate in order to fulfill these orders. Amazon is one of the largest tenants/owners of industrial real estate in the country and are always continuing their growth in the sector. The need for distribution space has grown tremendously year over year because of the boom of e-commerce”.

Yields

Industrial real estate has always offered an alternative investment product; the nature of the operating activity and capex investment means a long lease is necessary. In a post COVID world where office lease lengths are falling (shifting to flex), investors are looking to more stable low-risk opportunities.  Industrial real estate offers that stability. Furthermore, to Mike’s point above, COVID has accelerated ecommerce demand for distribution space reducing supply even further and bolstering investment yield.

Technology

Industrial real estate has been slow to adopt technology for a variety of reasons.  For starters, the price per square foot is significantly lower compared to office and retail, so there is less margin to invest in technology.  Additionally, there is a tremendous amount of variability in the use cases for industrial properties.  The same space could be used for anything from housing server banks, to sneaker inventory, to cold storage, to the FBI storing highly classified files.  This variability makes it challenging for a landlord to invest in certain technology because what is important for one tenant can be completely useless to another one.  However, technology is starting to make its way into industrial in very creative ways.  I had an incredibly interesting call this week with a CEO who has built a solution that is marrying industrial real estate and technology together in a way that is creating massive wins for both landlord and tenant that’s never been done before.

Smart Warehouse 

Connell McGill is the Co-Founder and CEO of Enertiv, a connected SaaS platform that brings together modern software tools to digitize operations and provide real-time visibility into the performance of critical infrastructure for commercial real estate portfolios. With Enertiv, owners and operators can ensure that on-site teams are operating buildings at peak performance while gaining complete transparency into maintenance, energy efficiency, capital planning, tenant billing, the indoor environment, and more.  Enertiv was founded in 2011 and has built a suite of solutions that are well known in the office and multifamily sectors.  Approximately 3 years ago, Enertiv found an opening in industrial real estate that they believed when executed correctly, could provide a value add for both the landlord and the tenant.

Enertiv started partnering with tech-forward industrial portfolio owners.  The owners offered to pay for upgrades to energy-efficient LED lighting for their tenants (most industrial leases are NNN, which means that the tenant typically pays for all operating costs).  In return, the tenants would pay a portion of the savings from their reduced energy costs to the landlord which overtime eventually covered the cost of installation.  Enertiv provides the data backbone; submetering the lighting loads, calculating the savings, and enabling supporting the billing process for the landlord.  The end result was a tenant with better quality lighting (which they didn’t pay for) and a reduced energy bill, and the landlord was eventually paid back in full for their expenses and they owned an asset which increased in value due to the upgrades.

This solution was a huge victory for Enertiv and their clients, but it was just their start into industrial real estate.  Once tenants saw how technology could improve efficiency and provide cost savings, they wanted to leverage Enertiv for additional services.  The “Smart Warehouse” was born.  Enertiv now installs networking hubs into industrial buildings on behalf of the landlord, and tenants have the ability to choose from dozens of IoT enabled solutions that are powered by Enertiv. They provide an App that monitors temperature, humidity level, lighting level, dock doors activity, parking lot activity, air quality, carbon monoxide, HVAC, occupancy, space utilization, energy consumptions, and more.  Tenants can monitor their usage and savings and immediately identify issues.  Landlords can remotely monitor these conditions to make sure that they are not wasting any costs on vacant spaces.  Additionally, Enertiv provides a service where they “digitize the asset”.  This means that they capture nameplates on all critical infrastructure, documentation like warranties, parts lists, O&M manuals... even troubleshooting videos. They create unique QR codes for each device and build a digital handbook for operating everything.  When a new tenant moves into the space, they can access the Enertiv App for details on each piece of infrastructure, how to run everything, real time uptime, analytics, and more.  There are no surprises for the new tenant.  Additionally, this allows landlords to use data to make inferences on end of life for critical infrastructure.

Workflow

According to Joe Moskowitz, Director of Business Development and Strategic Solutions at Dealpath, “Industrial is a very sought after asset class right now when it comes to trading hands, and those investment teams looking to add more logistics assets to their owned portfolio can leverage Dealpath for the management of this workflow and analysis.”  Dealpath offers a suite of solutions which streamlines industrial acquisition workflow, industrial disposition workflow, logistics portfolio reporting & analytics, and industrial loan originations pipeline tracking.  "Top investment teams across the globe are setting themselves apart in this increasingly competitive and remote landscape by leveraging a deal management platform that's purpose built for real estate and can intuitively configure tasks, workflow, and collaborators based on deal characteristics, such as industrial asset type" says Moskowitz.

Dealpath referenced a case study that they did with Link Logistics Real Estate where they provided them with a solution to move from “excel and scattered data sources” to a single cloud based platform which centralized and consolidated all of their data and information.   Link also worked with Dealpath’s customer success team to customize their workflows and reporting, including an integration with their property database, Yardi.  Link can see an overview of every one of their deals—who bid on it, who the broker was, and the full deal timeline. While many of the top industrial investors are currently leveraging Dealpath, the platform's deal management solution is asset type agnostic and being used across all commercial deal strategies.

Mapping

Mapping technologies have become essential in the real estate industry and industrial is no exception. geothinQ is a fast and easy to use map-based platform for finding and evaluating property for development.  According to Christopher Nichols, geothinQ’s General Manager, “Industrial brokers and site selectors alike utilize our technology to make land queries for suitable off-market parcels. geothinQ also contains compelling visual layers that portray land development suitability on a national scale. Once users identify industrial sites that are a fit within the platform, they utilize our land layers to make it easy to evaluate the lay of the land in terms of topography, wetlands, proximity to rail, flood zones, and more”.  geothinQ contains tools that integrate with an organization's existing workflow helping to manage the due diligence process, track prospective sites and communicate these potential sites to their clients.

Similar… but also Very Different

I spent the week speaking with industrial focused agents and my take was twofold.  The way that agents prospect for customers is no different than that of office or even residential;  researching likely buyers and sellers, social media, email blasts and networking.  The target persona may be different, but the strategy the same.  But while prospecting may share similarities, decision making is starkly different.   Residential has a highly emotional buyer journey, office less so but still present, but industrial is purely pragmatic.  As referenced in SVN, there are really 3 factors that matter for industrial real estate and that is location, size, and price per square foot.  However, as technology continues to infuse itself into industrial buildings, my assumption is that the tech infrastructure installed in a property will contribute to a growing percentage of the characteristics that owners, investors, and tenants look for. 

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