Ways to Invest in Warehouse Properties

Ways to Invest in Warehouse Properties

Posted by on Jun 16, 2021

warehouse

The nation’s continued evolution toward online shopping, hastened by the pandemic, has sparked increased demand in warehouse space as brick-and-mortar retailers seek to ramp up their e-commerce strategies by expanding their digital footprints

Consider: In 2019, consumers spent just shy of $600 billion in online purchases. In 2020, however, that number spiked 44 percent to $861 billion, or just under one-quarter of all U.S. retail purchases for the year.

While mandatory lockdowns and lengthy retail store closures were primary drivers of the runup in e-commerce sales, these shopping trends are expected to continue.² Investors seeking to capitalize on changing consumer dynamics by investing in warehouse properties have multiple options to add this asset class to their portfolios.

Types of Warehouse Properties

Before we dive into ways to invest in warehouse properties, it’s important to understand the different types and classes of this sector of commercial real estate.

Warehouses fall under the wider umbrella of industrial real estate.³ There are three primary categories of industrial properties:

  • Storage and Distribution
  • Manufacturing
  • Flex Space

Warehouses are used for the storage and distribution of goods to consumers or end users. Distribution warehouses, or fulfillment centers, are strategically located so shipments can reach as many consumers as possible in the shortest time frame. General warehouses, meanwhile, are primarily used to house goods for longer periods of time, so location isn’t as important.

Warehouses also fall into three distinct product classifications: A, B, or C.4 Generally speaking, Class A warehouse buildings are new or newer and are built to key industry specifications, such as overall building height, number of loading bays, and parking space requirements. Infrastructure such as lighting, fire suppression, and information technology systems are designed to the latest specifications in Class A warehouse properties. Rents generally are highest for this type of industrial product.

Class B buildings are the next step down. They are usually a bit older but still desirable. Rents typically are a notch or two below Class A properties. Class C warehouses, meanwhile, are older or aging facilities that usually lack expansive parking, truck turnaround room and have lower building heights that inhibit the volume of interior storage. Infrastructure is significantly outdated, and rents are usually lowest for this asset class.


Investing in Warehouse Properties

There are numerous ways investors can add warehouse properties to their portfolios. Industrial investments vary in size, risk, holding times, and other key factors. 

Direct investment in large Class A warehouse facilities is typically well beyond the financial means of everyday retail and even accredited investors. These multi-million-dollar properties are usually owned by industrial REITs,5 pension funds, or well-capitalized institutional investment firms.

That’s not to say that retail investors can’t get some skin in the Class A industrial development game, however. Investors determined to bring this asset class into their portfolios can search out Delaware Statutory Trusts6 backed by Class A industrial assets and purchase fractional shares of the DST according to their investment strategies and tolerance for risk.

Another option is to purchase shares of industrial REITs that develop and acquire warehouse properties. These investment vehicles typically have 75 percent or more of their assets in industrial real estate.7 Investors also can participate in industrial property deals on various crowdfunding platforms. 


The Bottom Line

There are many factors to consider prior to making investments in warehouse properties. Despite current demand for warehouse properties, there are important risk factors to consider, including tenant vacancy, oversupply, large capital expenditures on aging facilities, illiquidity, and management experience. Weigh these factors against your overall investment philosophy prior to jumping into this sector of commercial real estate.


Sources:

1. How the Coronavirus is Changing e-commerce, Digital Commerce 360, https://www.digitalcommerce360.com/2021/02/15/ecommerce-during-coronavirus-pandemic-in-charts/

2. Five E-Commerce Trends That Will Change Retail in 2021, Forbes, January 2021, https://www.forbes.com/sites/michelleevans1/2021/01/19/five-e-commerce-trends-that-will-change-retail-in-2021/?sh=27e2268d1435

3. Types of Industrial Real Estate Properties, ProLogis, https://www.prologis.com/about/resources/industrial-real-estate-building-types

4. Building Classifications, Lee & Associates, https://www.lee-associates.com/orange/commercial-real-estate-building-classifications-a-b-c/

5. A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.  There are risks associated with these types of investments and include but are not limited to the following:  Typically no secondary market exists for the security listed above.  Potential difficulty discerning between routine interest payments and principal repayment.  Redemption price of a REIT may be worth more or less than the original price paid.  Value of the shares in the trust will fluctuate with the portfolio of underlying real estate.  Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes.  This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein.  The offering is made only by the Prospectus.

6. There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results.  Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney.

7. Industrial REITs, MillionAcres, https://www.fool.com/millionacres/real-estate-investing/reits/industrial-reits/

 


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