Real Estate: The Industrial Revolution
This week, Brighton House analysts spoke with several investors that are interested in real estate funds focused on the industrial sector. Investors have pointed to a couple of reasons for their interest, the foremost of which is the theory that industrial funds provide a steadier cash flow than other types of real estate funds.
Industrial real estate funds offer investors a certain level of cash flow stability due to the types of tenants investment properties accommodate and the lease terms that are created. Tenants renting industrial properties require the use of the facilities to operate a major part of their businesses, such as manufacturing, storage, and so on. They often sign longer-term leases and have less of a tendency to vacate due to the high costs of transporting or moving their equipment. Even in this type of economic environment, tenant turnover remains relatively low. Therefore, industrial property funds should be able to generate a consistent level of cash-on-cash returns as well as a strong long-term rate of return.
In comparison, commercial property funds investing primarily in retail or hotel properties may be experiencing quite a bit of volatility and turnover in this market environment. With smaller businesses, start-ups, and self-employed parties occupying retail office buildings, there is a good chance that tenants will default on their rent or have to move out, leaving vacancies that then need to be filled as soon as possible. Commercial property tenants sign shorter-term leases and do not find it as difficult or costly to relocate if they need to find space that offers a lower rental fee.
A few investors this week actually mentioned that they are specifically avoiding funds investing in hotel- and hospitality-related properties. With the economy where it is, leisure travel may not be an option for many people this year, leaving hotels, for example, with higher vacancy rates and lower revenues. These types of commercial properties are associated with more risk than some investors are willing to take.
Brighton House analysts expect the interest in industrial-focused funds to continue during the next several months as real estate investors look for some sort of stability in this market. Even if conditions do not improve in the near future, the long-term horizon of real estate investments provides potential for strong returns at the end of the funds’ investment cycles.