Industrial and warehouses

Industrial property includes warehouses, distribution centers, and smaller ‘flex’ or light-industrial buildings used for storage, light manufacturing, contractors and showrooms. The buildings are simple, often described as four walls with a lot of air in between. Tenants usually pay most operating costs under triple-net leases.

Online shopping drove a huge boom from 2020 to 2022. Vacancy fell to record lows and rents jumped. New warehouses were often fully leased before construction finished, and developers then built a lot of new space. In Nevada, vacancy in Southern Nevada fell to 1.3% in 2022. In California, much of the new space went up in the Inland Empire. In Arizona, much of it went up around Phoenix.

Since 2023 demand has cooled. Amazon and other companies gave back space, vacancy rose in the Inland Empire and Phoenix, and rents slipped. Large new buildings without tenants are the most exposed. Small, well-located buildings that local businesses need tend to hold up better.

Who it suits

Investors who want long leases where tenants pay most property costs, with little day-to-day management.
Owner-users (contractors, distributors, small manufacturers) who buy the building their business uses.
Buyers of smaller, well-located buildings near highways and population centers where local demand is steady.
Patient investors who can ride out a few years of higher vacancy.

Who it doesn’t

Beginners developing large speculative warehouses (built before tenants sign).
Owners who depend on one big tenant whose needs could shrink (Amazon gave back space in 2022).
Buyers who can’t pay the loan through a long vacancy. Large buildings can take a long time to re-lease.
Anyone ignoring local opposition and environmental rules for truck-heavy sites (strict in parts of California).

Real stories

Fully leased before finished, sold for $143 million (2022)

SunCap Property Group and a partner built SunPoint West, six warehouse buildings on almost 40 acres in North Las Vegas. The project was fully leased before construction ended in September 2022 and sold the next month for about $143 million to German asset manager DWS. Online shopping had pushed local vacancy to record lows.

Lesson: Warehouses do best when demand is strong and tenants sign before the building is finished. Timing matters. Las Vegas Review-Journal: Southern Nevada industrial market keeps flooring it (Nov. 2022)

Two leased warehouses sell for $271.5 million (2022)

CapRock Partners built two warehouses totaling 1.1 million square feet off Interstate 15 in North Las Vegas. Both were fully leased, the larger one to Amazon. Property records showed Eaton Vance bought them for $271.5 million. A CapRock executive called pricing ‘a little bit frothy’ even as demand stayed strong.

Lesson: Fully leased warehouses with strong tenants attract buyers, but prices set at the peak of a boom can be hard to repeat. Las Vegas Review-Journal: New warehouse project in North Las Vegas sells for $271.5 million (May 27, 2022)

Amazon sublets space as online sales cool (2022)

Amazon roughly doubled its warehouse network during the pandemic, then found it had too much space. In 2022 it said it would sublease some warehouses. Bloomberg and the Wall Street Journal reported at least 10 million square feet, and possible lease exits in states including California. Sublease space competes with landlords trying to lease their own buildings.

Lesson: Even the biggest tenant can shrink. Don’t assume a boom’s demand will last. Associated Press (via WSLS): Amazon to sublease warehouses as online shopping slows (May 23, 2022)

The Inland Empire warehouse boom stalls (2024)

After years of nonstop growth, Inland Empire warehouse leasing slowed in 2023. Companies gave back space they took during the pandemic. Rents dipped and lease terms shifted in tenants’ favor. The Los Angeles Times reported warehouses closing in Rialto, Fontana, Jurupa Valley, Perris and Chino. By early 2024 vacancy reached 11% in Redlands.

Lesson: Markets with lots of new construction can flip from shortage to surplus fast. Buy with enough reserves to wait for tenants. Patch: Inland Empire’s white-hot warehousing sector cools (Feb. 22, 2024)

Costs

Vacancy and re-leasing time. Inland Empire vacancy reached 5.9% in early 2024, with 11% in Redlands (CBRE, via Community Forward Redlands).
Roof, parking/truck court paving, dock doors and fire sprinklers (major capital items).
Tenant improvements and broker commissions when leasing.
Property taxes and insurance. California purchases trigger reassessment to market value (Board of Equalization).
Environmental reports, especially for sites with past manufacturing or fuel storage.

How people pay

Bank and life-insurance-company loans based on lease income. Strong tenants on long leases get better terms.
Owner-users can use SBA 504 loans (long-term, fixed-rate, up to $5.5 million) to buy their own building, if the business uses at least 51% of it (60% if newly built).
Speculative development uses construction loans that have to be repaid or refinanced, so if the building doesn’t lease, the developer gets squeezed.

Check before you buy

Check the tenant’s financial strength, the lease length and renewal options.
Look at local vacancy and how much new space is under construction nearby.
Inspect clear height, loading docks, truck access, power and sprinklers, since these decide who can use the building.
Get a Phase I environmental report.
Confirm zoning and any city limits on warehouse uses or truck traffic.
Estimate how long re-leasing would take and how many months of payments you can cover.