In line with the Global Industry Classification Standard, industrial REITs are defined as real estate investment trusts that are primarily involved in the acquisition, development, ownership, management and leasing of industrial properties such as factories, distribution centres and warehouses.
Properties in industrial REITs are typically located away from a country’s central business district and can either exist as a standalone building leased out to multiple tenants, a cluster of buildings within an industrial park or even a standalone building leased out to a single tenant.
Advantages of Industrial REITs
Proponents of industrial REIT often cite its relatively faster reaction time to economic cycles, in comparison to other REIT sectors, as an investment advantage. Unlike hotels or shopping malls, properties in Industrial REITs take a shorter time to build and will rarely exceed a year of construction time. As such, developments of industrial buildings are largely considered to be more responsive to current economic conditions and are not as susceptible to excessive overbuilding.
Another advantage often attributed to industrial REITs is the fact that its properties are relatively more configurable and can be adapted to meet specific demands at specific points of time in the economic cycle. As the economy slows down and floor inventory piles up, space that was previously used for manufacturing activity can be quickly converted into a warehousing facility or even office space, subject to regulatory approvals. This adaptability is seen as an investment advantage.
And lastly but perhaps most importantly, industrial REITs require relatively more modest capital expenditures, or CAPEX, in comparison to other REITs. Again, unlike hotels and shopping malls, properties under industrial REITs have little need for periodic aesthetic makeovers or asset enhancement initiatives. Modest CAPEX would usually translate into more income distribution for unitholders.
Disadvantages of Industrial REITs
Leases for properties in industrial REITs are typically shorter than REITs in other categories with most being only 30 years. There are Industrial REITs with properties on longer leases but these rarely exceed 60 years. These short terms of lease means that there may not be as much opportunity for organic growth in aggregate portfolio value when compared to other REIT types.