What is industrial Real Estate?
Industrial real estate can be defined as either land or buildings which house industrial activities such as a manufacturing plant, warehouse, assembly buildings, production properties, storage, and distribution. Unlike the residential industry and commercial industry where there’s an abundance of houses for sale or rental units, the industrial real estate sector is less saturated which makes getting started on investment in industrial real estate investing a little bit more complicated.
What is the capitalization rate in the Industrial Sector?
Cap rate i.e. capitalization rate is derived from dividing a property’s net operating income with the current value of the property in the market. It shows the amount of time it will take to recover an investment in property.
Do they use capitalization rate at all in the Industrial Sector?
In the Industrial sector, the cap rate is used and is important because it shows the investor the potential return they can make on a property listing or sale. Investors hoping for deals with a lower purchase price may, therefore, want a high cap rate.
What do you need to calculate the capitalization rate of industrial properties?
The 2 most important things you need in order to calculate the cap rate for your industrial property are- the amount it would cost you to buy the property/ land and the property’s net operating income.
What is the capitalization rate for Industrial property?
Typically, compared to multi-family homes where the cap rate is around 2%, the Industrial Cap rate tends to be around 5%- 6% depending on the type of building and location of the property. A good capitalization rate for rentals hovers around 4%. If you look at cities like Los Angeles and New York which are really large compared to smaller metropolitan cities like Santa Monica, you will notice that smaller towns will have higher cap rates because these towns have the potential to grow as opposed to cities that have already grown. Of course, other factors such as the size of the market and capital liquidity also come into play.
What would a typical cap rate be in Southern California vs somewhere else in the country?
California’s highest and best use up until recently were hotel, multi-family, or mixed-use developments. Until that changes, it is unlikely that the dynamics of downtown LA or that of any urban markets is going to change unless some of the big players such as logistics companies and eCommerce companies are willing to pay a premium which will kind of balance the pendulum and move it away from hotel or retail or mixed-use.
