The Conversation: Understanding America’s Industrial Real Estate Landscape
In a recent episode of “America’s Commercial Real Estate Show,” the show host delved into the complex and evolving world of industrial real estate with his guest, Aaron Halfacre, CEO and President of Modiv Industrial. Modiv Industrial is a Real Estate Investment Trust (REIT) that owns and leases manufacturing facilities across the United States. The conversation provided insights into the resurgence of manufacturing in the U.S., the unique challenges and opportunities within the industrial real estate sector, and the investment potential it offers. The essence of this conversation revolves around industrial and manufacturing real estate throughout the United States. Given this, recognize that some observations may be less pertinent or entirely irrelevant to such in Miami.
The Resurgence of U.S. Manufacturing
The host kicked off the discussion by addressing the buzz around the resurgence of manufacturing in the United States. With global challenges like supply chain disruptions and the COVID-19 pandemic, there has been increasing talk about bringing manufacturing back to U.S. shores. Halfacre confirmed that this trend is indeed a reality. He pointed out that various factors, including supply chain disruptions, geopolitical tensions, and a shift towards just-in-case inventory strategies, have contributed to the revival of domestic manufacturing.
The Importance of Critical Manufacturing
Halfacre emphasized that Modiv Industrial focuses on critical manufacturing sectors such as aerospace, medical, and defense. These industries produce goods that are indispensable and cannot be substituted or outsourced easily. Unlike consumer discretionary items, which can afford longer lead times, critical components require a more immediate and reliable supply chain, making domestic production essential.
Long-Term Leases and Specialized Facilities
One distinguishing feature of industrial real estate in the manufacturing sector is the prevalence of long-term leases, typically spanning 20 to 25 years. These leases reflect the specialized nature of manufacturing facilities, which are often tailored to accommodate specific equipment and production processes. For instance, equipment like heavy presses or specialized machinery necessitates custom-built spaces that aren’t easily interchangeable, contributing to the stability of tenancies.
Investment Dynamics in Industrial Real Estate
The host and Halfacre discussed investment dynamics within the industrial real estate sector, particularly focusing on cap rates and barriers to entry. Unlike traditional industrial properties like warehouses or distribution centers, manufacturing facilities tend to have slightly higher cap rates, reflecting the specialized nature of the assets and the longer lease terms. Moreover, the barrier to entry is higher due to the substantial upfront investment required for specialized manufacturing infrastructure, which often deters individual investors.
Underwriting Manufacturing Facilities
Halfacre shed light on the nuanced process of underwriting manufacturing facilities, emphasizing the importance of understanding the industry, the specific needs of tenants, and the local market dynamics. Unlike retail or office spaces, where metrics like demographics and foot traffic play significant roles, underwriting manufacturing assets requires a deep dive into the operational aspects of the tenant’s business, including supply chain reliability, labor requirements, and industry outlook.
The Human Element in Industrial Real Estate
Throughout the conversation, Halfacre underscored the human aspect of industrial real estate. Despite the focus on tangible assets and financial metrics, successful investment in manufacturing facilities hinges on building relationships with tenants, understanding their operational needs, and aligning investment strategies with long-term economic trends.
Conclusion
The dialogue between the show host and Aaron Halfacre provided valuable insights into the industrial real estate sector’s intricacies, highlighting its resilience, investment potential, and the critical role it plays in supporting domestic manufacturing. As the U.S. continues to navigate global challenges and economic shifts, industrial real estate stands as a cornerstone of economic stability, offering investors opportunities for long-term growth and income generation.
In summary, the conversation illuminated the multifaceted nature of industrial real estate, emphasizing its significance in shaping the future of American manufacturing and its enduring appeal as an investment asset class.