Industrial Real Estate Appraisals

Industrial Real Estate Appraisal

Industrial real estate appraisers, or industrial real estate appraisal companies, have many concerns that need to be taken into consideration before providing an opinion of value for a particular property.  Those include the potential environmental liabilities, the type of building being appraised, and the property rights being valued, (fee simple or leased fee).  In addition, there are other property characteristics that need to be evaluated, some of which are discussed below.

photo of Multi tenant industrial

Industrial Districts

Industrial districts vary, ranging from districts that with heavy industrial use including steel plants, oil refinery, paper mill, power plant, shipbuilding, and foundries, to light industrial, with uses that focus on consumers - like assembly, storage, and distribution.  In most areas of the country industrial districts are designated through zoning, which often limit specific uses.  Within each use, specific ordinances often address pollution, noise, building height and size, floor area ratios, parking, density and other topics.

Environmental Liabilities

Environmental concerns with industrial properties can be very complex compared to other property types.  Industrial properties often contain above ground and underground storage tanks for storage of a broad range of industrial chemicals.  In older buildings, asbestos and PCBs might be present.  Contamination can be extensive, with high cleanup costs. Underground storage tanks may leak a variety of chemicals, including hydrocarbons, creating Leaking Underground Storage Tanks, (LUST's).  Remediation can be extensive and extend over many decades, with a legacy than can extend for decades, passed from one owner to the next.

Industrial Property Locations

Industrial properties are usually found on large plots of land or in industrial parks.  These parks are often interior to the block or on outlying areas away from the city core with cheaper land.  Industrial users often do not have a need to be seen, unlike retail and officer users.  Industrial users do not have a need for traffic visibility, but do want to be near transportation hubs like:    

Types of Industrial Buildings

There are common types of industrial buidlings that are found in most markets. Some typical types of industrial properties found in most markets include: 

photo of tilt up concrete construction being  raised

Concrete Tilt Up Industrial Building

Concrete tilt up industrial buildings are very common, as they are comparatively inexpensive and offer a quick and efficient way of constructing warehouse properties and other commercial property types.  The panels are poured on site, which eliminates the need for transportation, since they are made on the property.  Because they are made on site, they can be large and tall - with the only limit being the size of the job site.

They are common in warehouse properties and light industrial, and some strip malls.  Special categories of concrete tilt up are Unreinforced Masonry Buildings, (URM's).  URM's have no steel reinforcement within the poured masonry walls, and were typically built before 1933.  URM buildings are dangerous in earthquakes.  When the walls are rigid and the roof is flexible, the connection between the roof and the walls shake apart, and the wall panels can fall away from the building, causing the roof to fall into the building.

Older URM buildings can be retroit with additional brackets to connect the walls to the roof, reducing the odds of the walls separating from the roof and collapsing.

Newer Tilt Up Construction Techniques

photo of construction casting bed

Newer construction eleminates URM buildings by the use of a rebar grid constructed inside the form.  The process starts by workers installing footings around the perimeter of the building, in preparation for the heavy concrete panels that will be hoisted on them later. After the footers, a concrete pad is poured for the floor, which, when cured, will serve as the bottom of the forms to be built. 

Forms are then built on top of the pad.  Laborers work from drawings provided by engineers to design each panel to be built on the site.  They frame out all door and window openings, as well as other features that can be fromed from concrete.     The panels are then poured on the job site using a casting bed, which is a large mold, often made from wood studs.  The casting beds are filled with rebar and other materials to strengthen the concrete when cured.

photo of concrete panels after being hoisted into place

When poured, the concrete is then vibrated to insure the concrete fills all spaces in the honeycomb form to prevent voids.  When the forms are removed after the concrete has cured, rigging is attached and cranes tilt the panels into place over the footers. They are secured with braces until structural steel elments and roof are in place. 

Advantages to tilt up wall panels is that they are load bearing, eliminating the need for perimeter columns and roof beams.  Column free walls means reduced construction costs, and for warehouse properties, offers increased interior floor space capacity.  The tilt up panels can be large, with fewer panel joints, giving air and water fewer places to penetrate and thus reducing maintenance costs.  

photo of metal warehouse building

Metal Warehouse Buildings

Some of the advantages of metal buildings is that they resist warping, buckling, twisting or bending. Steel buildings, if properly built, resist damage from natural forces like winds, heavy rains, termites, fire and mold, thus reducing maintenance costs. 

This disadvantages are heat conductivity, with metal buildings conducting heat much more rapidly that structures built from wood.  Metal can corrode, and the metal elements can bend in very hot fires. 

Building components that are built in a shop and shipped to the site are commonly called prefabricated buildings.  During the prefabrication process, these metal or steel buildings can be pre-punched with openings and have designs that allow them to be bolted together at the site, saving contruction time.  Because of their strength and fire resistance, they often have lower insurance costs.  With some builds, the steel panels weigh less than other construction materials, placing less weight on the foundation and reducing the chance of foundation repairs.   When the steel building reaches the end of its useful life, the steel panels can be scraped and recycled.  

photo of block warehouse building

Masonry Block Warehouse Buildings

Concrete hollow blocks are made by compacting and vibrating at high pressure, making the blocks strong and durable.  Because of their strength, they can withstand high levels of load, and are resitant to fire, thus reducing maintenance costs and insurance.  They can be cost effective, with one block replacing five traditional bricks, thereby reducing weight.   The weight reduction is easier for laborers to handle, and the uniform size and shape allowing less skilled workers to assist in the build.  

Concrete hollow blocks have insulating properties,thereby reducing energy consumption.  The blocks offer eathquake resistance because they are lighter than other building materials, reducing the building load on the foundation, making it less susceptible to natural disasters. 

photo of multi-tenant industrial building

Multi-tenant Incubator Warehouse Buildings

Multi-tenant warehouse space is often refered to as "incubator" space, in that it offers a small but affordable office/warehouse suite that are usually leased.  This is a large class of industrial, with approximately 40% of all industrial space considered to be multi-tenant.  Suite sizes vary, but often the incubator space is built-out with 300 - 500 SF of office, and a warehouse space of approximately 1,000 SF.  The warehouse almost always will have a roll-up door in the back to allow vehicle access.  

These spaces are popular among entrepreneurs who are just getting started.  If sucessful, the tenant can eventually lease adjacent suites as their business grows.  Leases tend to be of shorter duration of 1-5 years, offering the tenant the option of leaving for better space at lease expiration, or allowing the landlord to increase rents over time. 

photo of flex or showroom industrial

Flex or Showroom Industrial Buildings

Flex or showroom industrial buildings begin with "flex", a concept where warehouse space can be converted or "flex", into different use, all within the same warehouse.   As an example, perhaps a user has a property that is 100% warehouse, but then decides he needs office space, so he builds out 10% of the warehouse with office.  Two years later the user decided he need to hire a sales team, and need to take the remaining 90% of the warehouse and build out additional office so that 50% of the total space is now office.  This is the concept of "flex", by using the existing space for another purpose. 

Showroom industrial is similiar to flex, in that the a portion of the warehouse space is converted into "showroom", where products or goods are displayed for walk-in customers.  As an example, a 5,000 SF warehouse is occupied by a company that sells flooring products.  The user decides to build-out with 1,000 SF of the space with  showroom improvements, in order to display his flooring products to customers.  This is concept is refered to as a "showroom" industrial building, where a portion of the warehouse space is built out with showroom improvements.  

Other Industrial Building Types

Within the concept of "industrial" buildings,there are a wide variety of specialized uses including: 

Valuing Specialized Use Industrial Properties 

Special purpose industrial properties are difficult appraisal assignments, usually because there is no good comparable data.  With no sales or rental data, separating the real estate from the business value becomes difficult.  If the property has income, then that should be separated into real estate and business, but even if that can be accomplished, what capitalization rate or discount rate is appropriate for the income stream?  

graphic of yield rate for property conversion

Ease of Conversion

If a particular unique industrial property needs a value, often a useful approach is to estimate the cost of conversion of the property into a common use found in the market.  As an example, smaller real estate units are typically easier to sell because more of the market can afford to buy or lease them. 

Assume we have a large 100,000 SF single tenant warehouse with no comparables sales in the market.  But in the market, there are sales of 100,000 SF multi-tenant industrial buildings.  The question might be, is the 100,000 SF single tenant industrial building a good candiate for conversion to a 100,000 SF multi-tenant industrial building?  Is so, how much would the cost of conversion be?   

Even if the unique industrial property can be converted, there is risk.  The more unique the industrial building is to the market, the more risk there would be to a developer to take the property and convert it into an alternative use.   That risk needs to be reflected in a higher capitalization rate, or in a higher yield rate if a discounted cash flow is used.