When investing in commercial real estate, buyers and investors have a number of different options as it relates to property type. One possible investment is a warehouse property, which comes with a wide range of benefits and a high potential for profit. This article will explain the pros and cons of buying a warehouse, factors you should consider during your research, and how to buy a warehouse as an investment property.
Before making the decision to buy a warehouse, it’s important to have an idea of all the potential advantages and disadvantages to make an informed decision.
“The pros of buying a warehouse definitely outweigh the cons,” said Jason Keyz, CEO and Principal Broker at KEYZ Group, Inc., a commercial real estate advisory firm. “Warehouse properties, a segment within the ‘industrial’ property type, happen to be one of the most desired segments now and will continue to be for years to come.”
For starters, warehouses come with a higher income potential, simply due to the size of warehouse space. With more square footage, landlords can charge higher rent. A warehouse investment is generally less volatile than other types of investments. Tenants tend to stay in the space long-term, which means a more stable income for the property owner.
“Depending on the size — but definitely with larger spaces — you end up with strong credit tenants willing to sign long-term leases,” said Keyz, adding that warehouses typically have “high demand and very low turnover.”
Warehouses are also usually rented with triple net leases (NNN), meaning the tenant is responsible for maintenance, insurance and taxes associated with the property, leaving less responsibility to the landlord. Essentially, the property owner is receiving passive income from a warehouse rental because the investment is so hands off. Another benefit of investing in a warehouse is that the property is likely to appreciate over time, and the owner doesn’t really need to do anything to create that appreciation. Usually, when a lease agreement expires for a warehouse, the landlord will be able to charge higher rent with a new lease because the value of the warehouse will be higher than when the original lease was signed. If the owner chooses to sell, they stand to walk away with more money, thanks to the appreciation.
The reasons for this value increase are more equity from the money being paid into the loan, as well as possible upgrades in the warehouse that a tenant might have made for their business needs, also known as tenant improvements. For instance, maybe the old tenant installed shelves or created storage space that can now be accounted for in any lease agreement with a new tenant. “Warehouse properties have consistently proven to thrive in upmarkets and also survive during recessions,” Keyz noted.
Finally, owning a warehouse comes with a series of tax deductions. Property owners can deduct for depreciation, if there is any, as well as mortgage interests, repairs and management. However, an accountant will better be able to tell you what tax deductions apply to your specific situation.
When it comes to disadvantages to buying a warehouse, there are only a few, but it’s important to understand the possible downsides. Mainly, property owners and investors should be aware that there’s always a vacancy risk when it comes to warehouses or any other type of property.
“A fair amount of warehouse properties end up being single-tenant properties, and as I have coached my clients for years, there is no calculating the risk or vacancy factor when it comes to a single-tenant property,” Keyz cautioned. “You’re either 100% occupied or 0%.” Marina Vaamonde, the Founder of WarehouseCashin, added, “A warehouse with a single tenant increases your risk if they default or don’t renew their lease. They are long-term investments, which won’t fit a short-term investor.“
Warehouse properties vary widely in price depending on “size, geographic location and market conditions,” Keyz said. However, Vaamonde estimated that urban warehouses can cost anywhere from $125 per square foot (PSF) to $250 PSF, while nonurban warehouse spaces might range from $75 PSF to $125 PSF.
To determine the cost of a warehouse in your area, it’s best to look at similar properties in the area to compare the PSF costs. Other factors that might affect cost are the condition of the warehouse, whether it’s an old or new building, what type of equipment or specialized features are inside, what the tenant potential is and whether there are other interested parties.
The first step to buying a warehouse is finding an experienced CRE broker who can help with your deal. Debt brokerages can help you connect to debt funds while investment sales brokerages can help you find traditional financing options. “As with any other commercial real estate acquisition, working with an amazing broker is always directly related to the outcome and success of your purchase,” Keyz said. “Knowing how to locate a property and negotiate a deal are extremely valuable.” A broker can help with both of those tasks, helping you find the right property that fits your needs and then negotiating a deal that works for you. Once you’ve completed that step, you and the broker can discuss financing options.
A broker will help you get pre-approved for a loan, and once that step is complete, “you review searches your broker provides you, tour properties as needed, negotiate the terms of a purchase, get an offer accepted, complete due diligence and close on the sale as long as everything goes as planned,” Keyz explained. Part of that due diligence includes having “structural, mechanical, electrical and plumbing instructions done before closing,” Vaamonde added.
Once you’ve closed on the warehouse space, Vaamonde recommended budgeting at least 180 days for any possible repairs, cleaning and marketing before the warehouse is leased. And from there, you can likely “add another 60-90 days for the tenant’s uplift work before rent commences,” he said. You’ll also want to pay attention to how your warehouse is zoned. Typically, warehouses are located in industrial zones and have to abide by regulations set by the municipality. Make sure your uses align with your zoning permit.
To improve the profitability of your warehouse investment, Keyz first and foremost said to “buy at the right price.” He added, “Overpaying upfront means you’ll be playing catch up for years.” It’s also important to find good tenants at the right rate, Keyz said. In this regard, make sure you do your due diligence in researching your tenants, checking for income and credit score and thoroughly discussing their plans for the lease terms. Keyz also recommended “constantly looking for ways to refinance and better your debt (loan) position on the property.”
And in terms of creating more immediate profit, Vaamonde recommended adding structures like parking or loading docks and increasing utilities. Warehouse tenants are typically looking to store retail items in their warehouses. Amenities like climate control or additional ramps can help your facility get leased faster and sell for more money when the time comes.
Buying or investing in a warehouse property is generally considered to be a good investment, with the pros far outweighing the cons. However, it’s best to work with a commercial real estate broker and complete your due diligence before closing on a deal.
