Despite leading economists’ forecast of a coming real estate slowdown, the demand for industrial space remains strong.
Competition is fierce as investors seek to capitalize on the growth of online retail and the resulting demand for “last mile” distribution centers, snapping up the dwindling supply of industrial properties, while others get creative with adaptive reuse projects.
However, industrial acquisitions, and distribution centers, present a specific set of challenges. Proper site selection and due diligence can go a long way towards protecting your investment.
To offer true “last mile” distribution capability, a site should be close to end users and logistics hubs. Thanks to services like Amazon Prime, consumer expectations for rapid deliveries necessitate warehouses in or adjacent to population centers, along with available delivery contractors and ready highway access.
Once you’ve identified an appropriate location, the hunt begins for a building with adequate size and parking, appropriate ceiling heights and loading areas, sufficient HVAC and electrical systems, and capacity for heavy floor loads. A properly scoped Property Condition Assessment can help identify building deficiencies and with appropriate specialists evaluate suitability of specific building sub-systems for your intended purposes.
Industrial properties, especially ones formerly utilized for manufacturing purposes, can pose a wide range of environmental concerns. Notably hazardous waste generation, underground and aboveground storage tanks, oil/water separators, fueling operations, vehicle maintenance activities, and waste disposal. An ASTM-compliant Phase I Environmental Site Assessment can help identify and quantify potential risks posed by former property usage and improvements for the prospective purchaser.
Because ideal properties in target locations are hard to come by, many investors seek redevelopment opportunities. The increasing inventory of vacant, big box retail seems like a potential fit, but converting retail to industrial can be tricky—especially in terms of zoning. Vacant department or grocery stores, the retail spaces likely to be large enough to accommodate a distribution center, are also likely to be located in town centers or along busy corridors—areas not typically zoned for industrial use. While it’s possible to get a variance, cities will consider the impact on the community before issuing a variance. Distribution centers present the possibility of noise and heavy freight traffic—two reasons variances are often denied.
Another often overlooked consideration: distribution centers are “commercial facilities” under the Americans with Disabilities Act, and as such, subject to accessibility standards if any modifications are made to the building. Accessibility standards can be tricky, affecting parking ratios, building entry points, doorways and hallways, curb heights, and more. An accessibility assessment, performed by a Certified Accessibility Specialist (CASp), will identify barriers to access and help you understand how to address them before they become a liability.
Given the significant effort and cost required to acquire or develop last mile industrial, owners should take care when leasing properties to protect themselves and their asset. Distribution operations—due to the number of employees, the volume of product moving through the facility, and the amount of freight traffic—can produce a significant impact on a facility in terms of wear and tear. Lease agreements should clearly assign responsibility for maintenance and repairs. A specialized property condition assessment called a Lease Entrance/Exit Condition Assessment (LECA) can serve as documentation of the state of the property when your tenant takes occupancy, and a second assessment when the tenant quits the premises will allow you to compare and assign responsibility accordingly.
Whether you build new warehouse space or purchase and redevelop an existing building, investing in the last-mile industrial sector can be a complicating undertaking that requires a significant outlay of capital. Thorough due diligence can help you limit liability and safeguard your investment.