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What are the pros and cons of manufacturing versus distribution industrial property investments?

We have taken notice of the increased investment in industrial properties. Industrial seems to be a fairly broad asset class in that it has two major subsets in manufacturing and distribution. We are interested in potentially investing in industrial properties but would like to narrow our search. Is there better value in industrial property investments that involve manufacturing or distribution? Why does one subset offer better investment value?

  • Marcus & Millichap
    March 02, 2018

    The question is best answered by where the real estate is located. Fulfillment centers are highly favorable in major gateway markets compared to manufacturing.

  • Seyfarth Shaw LLP Real Estate Group
    March 02, 2018

    Manufacturing tends to have fairly specific requirements that are not easily matched to the next user. Also, manufacturing tends to carry greater environmental risk.

  • March 01, 2018

    The question is well taken and a good one to investigate. The answer will certainly be geographic specific, with certain "final mile" hubs being a clearly better use for distribution properties, while lower cost but well-connected locations being preferable for manufacturing. You will also need to think about locations of industries that provide a higher value for manufacturers that require more immediate customers, versus those that can import from overseas at a discount.

  • Black Creek Group
    March 01, 2018

    Manufacturing Facilities can be broken into 2 categories - heavy manufacturing (such as an auto plane) and light manufacturing (such as plastics or electronics). Heavy manufacturing is unique to the producer and is hard to convert to other uses - thus very few investors are interested in these properties. Light manufacturing properties are usually configured to be just like warehouses - so if a tenant leaves, they can be used for storage as well. There is usually a cost to removing equipment - so the lease requires the tenant to put the building back to its original state when the lease ends. Distribution warehouse is the most popular investment as it can be used by most companies. The key attributes to great properties are: 1) the best distribution markets; 2) the right submarkets within a market; 3) the right number of dock doors for the building size; 4) the right size truck turnarounds and parking (as truck drivers are limited to 10 hours per day of driving).

  • Greenberg Traurig, LLP
    March 01, 2018

    There is an enormous difference and the distinction is extremely important. Manufacturing facilities are leased to companies that manufacture there and are often specialized buildings with customized, specific fixtures and equipment, which can be very expensive. Adaptation and reuse of a manufacturing facility if a lease expires or a tenant defaults can be very problematic, because of the specific nature of the building, and often manufacturing properties are located where they are for convenience to the owners of the business or employees operating there, and if that business is gone, it may have little value to others. Distribution type industrial is really what all the rage has been about the last few years. The property can be used or occupied by almost any type of tenant as long as it has the right specification (floor load capacity, ceiling heights, freedom from columns, etc.) and is usually convenient to transportation by rail, highway or ships. These properties are of enormous appeal to any industry and have become in much greater demand due to the explosion of eCommerce where distribution centers located near transportation facilities are in great demand, with insufficient supply, and the needs still expanding. So, distribution type facilities with the right characteristics are a great asset class for investment and, except in unusual circumstances, manufacturing is much less desirable or stable.

  • SPC Advisors, LLC
    March 06, 2018

    At this point in time, industrial is one of the targets of investors in the US. The reasons for this include companies like Amazon and Walmart among others needing facilities for storage in locations that make it easy to distribute goods. Industrial properties can also be used for data storage. Manufacturing properties which are industrial are in demand for particular uses. To determine value, you need to look at markets where there is no oversaturation, and where the types of companies you desire as tenants are expanding or likely to expand. I always look for properties that can easily be converted to other uses, as markets and "hot" property types change from time to time.