What is Industrial Lot

What is Industrial property

Introduction

This post discusses what is industrial lot, it’s classifications and benefits in terms of investment. We will discuss also common industrial lot terms and list industrial park in the Philippines.

The industrial estate is not as popular as the other types of real estates. It is neither often talked about nor is often seen in the newspapers where residential estates are being showcased. Most people are only familiar with offices and retail establishments.

These are the places where they work and where they shop. People are not familiar with industrial properties where shipping of the goods that they purchase to take place.

There is a real deal of advantages to acquiring industrial real estate that is not appreciated by many. It is important to note, however, that expertise are needed if anyone wants to get involved in this type of investment.

What is Industrial Lot?

Industrial lots are used for a wide range of business activities and most are located outside of the downtown course. It is classified as one of the main types of commercial properties along with retail and office.

 Three main types of industrial real estate: small, large and enormous.

Small industrial properties are sites that are flexible. Properties belonging to this category are typically utilized as a mix of warehouse and office space ranging from one to two-story buildings.

It usually consists of 20% office in the front and 80% warehouse with a roll up door at the back. These spaces are leased by small businesses. These properties are great for first timers and a great alternative to apartment buildings.

Improvements for this type of property is easier and tenants take better care of the property compared to that of apartment buildings.

Large industrial properties are usually single tenant facilities with high ceilings and multiple loading docks. These include medium to large warehouses and factories that manufacture or store goods.

They have efficiently designed staging and processing of finished goods that are for immediate distribution. These are the types of warehouses used as third-party logistics. Products are received from manufacturers, assessed for quality and completeness and are then distributed to customers.

Due to the nature of its purpose, large industrial properties have multiple truck access at each side of the building.

Enormous industrial properties, based on what they are called are really large in size. These are referred to as the ‘big box’ industrial spaces.

They are designed to receive raw materials, manufacture and to distribute the finished goods to stores and/or directly to customers.

They are specialized based on the nature of manufacturing done where access to the skilled labor force is critical.

Difference Between Industrial Lot and Commercial Lot

Industrial lots are designed for manufacturers, processors and producers of goods that are sold to commercial businesses. These are factories, storage facilities, mining and shipping operations while commercial lots are designed for businesses. Usually, they have interactions with customers and business owners. Such are offices, retailers and service businesses.

Classification of Industrial Properties

Classifications of the industrial real estate can be identified through the physical characteristics of the building and how it is utilized. There are eight types of industrial properties which composed of two types of manufacturing, three types of storage and distribution and three types of flex space.

There are eight types of industrial properties which composed of two types of manufacturing, three types of storage and distribution and three types of flex space.

Manufacturing

When the word “manufacturing” is mentioned, it commonly projects an image of a factory where products are being produced and assembled. The property usually consists of 20% office space.

The property has loading docks for trucks. The two types of manufacturing:

Heavy manufacturing

These are large in size consisting of tens of thousands to hundreds of thousands square feet. This is where heavy-duty materials are produced which demand for heavy-duty equipment as well.

The building has three-phase electrical power and there should have plenty of spaces for trucks for the deliveries of raw materials and distribution of finished goods. Equipment is customized according to the nature of the products being produced and is rarely usable by the next tenant.

Light assembly

Compared to heavy manufacturing, the light assembly is considerably smaller in size and much simpler. Smaller products are assembled, stored and are shipped to consumers or third-party logistics.

With this nature, different tenants can make use of the facility with minimal reconfigurations.

Storage and Distribution

The size of buildings for this type of industrial estate varies depending on the nature of the business. While manufacturing sites are places where products are produced, storage and distribution is where products are stored and distributed to end users.

They also ensure the quality of goods that arrive at them and ensures the quantity delivered were counted correctly. They provide feedback to the manufacturers.

Distribution warehouse

The location of a distribution warehouse is important because this type of property is used by businessmen to ship goods to end users. It must be strategically located in the middle of the country and at the same time near an airport for the efficiency of distribution.

A good example is Amazon who occupies custom-built, high-tech fulfillment centers in the U.S.A. Amazon can offer same-day delivery to various markets.

General purpose warehouse

The main use of a general purpose warehouse is for storage. It has a few differences from distribution warehouse such as the existence of docks. Since items are not moved as often, lesser docks are needed and the location is not as important.

There can be a number of variants under general purpose warehouse, one of which is cold storage facilities which are furnished with freezers for perishable goods.

Truck terminal

These are sites where goods are loaded from one truck to another and have little to no storage spaces.

Flex Space

Space can be designed with flexibility depending on the need of tenants. It has at least 30% office space. The following are the different types of flex buildings:

R & D

These are facilities used by companies for research and development. Experiments are conducted for new products or development of existing ones. The design and equipment that can be found in the facilities vary on the tenant’s specifications.

Data Center

The size of these facilities is about 100,000 square feet or even more. So far, the world’s largest is 6.3 million square feet located in Langfang, China. Equipment is used for holding data, speeding up internets and making cloud storage possible.

Showrooms

The facilities consist of office space, warehouse and showrooms. Showrooms occupy most of the space at about 50% for showcasing and selling products. These facilities are typically used for car businesses.

Benefits of Investing in Industrial Properties

There is a wide range of benefits of investing in industrial properties. Some of which are listed below:

Better tenants

Tenants of industrial estate take care of the property and pay the overhead costs. While it seems appealing to invest in other variety of real estate such as residential, tenants do not take good care of the property and the overhead costs are shouldered by the owner.

Gives higher yields

It may take longer to achieve the return on investments, but investing in industrial properties will yield higher returns than that of a residential property. It is valued based on per square meter at about 8% compared to 4%-5% on a residential property.

Industrial leases also include fixed annual price increases which are often linked to consumer price index (CPI).

Long-term tenants

Tenants of industrial properties are large companies who operate on a large-scale basis. It will cost tenants higher expenses if they will transfer from one industrial property to another. For this reason, they are willing to sign lease agreements in a long-term basis.

There are tenants who sign for ten years, and if they don’t find a problem, they lease longer. This provides higher security than that of residential properties.

The longer the lease contract, the better security. Good relationship with the tenants is important to take note of. Some relate their relationship to ‘marriage’ where, both have to look for each other, respect one another and there are situations that both parties must give and take.

If sales are not doing good for the tenants, the estate owner considers lowering the lease rate and when sales are good, tenants are willing to comply with higher lease rates. With this kind of relationship, both parties benefit each other and will have a strong and lasting relationship.

Net leases

Unlike in residential estates, owners pay the overhead costs such as insurance, maintenance and repair. Industrial leases are net leases where the tenants are the ones responsible to pay for the cost of insurance, utilities, maintenance and other repair costs.

Low maintenance

The buildings are properly maintained by the tenants at excellent standards for the benefit of their business and start up design for the property is aesthetically less demanding.

For these reasons, industrial properties will not cost owners too much on building maintenance.

What to look in Buying Industrial Lot

In considering to buy an industrial lot, logistics is important. Industrial lots must have near proximity to highways, waterways and/or railroads. Proximity to resources such as workforce, specific skills and vendor are just as important.

Facilities in an industrial lot must have large open floor plans, high ceilings, well-place structural pieces, adequate electrical system and utilities, proper waste disposal and truck access.

Common Terms in Industrial Estate

Terms used in industrial estate are almost foreign if the language is not spoken on a regular basis. Here are a few common terms that are useful to be familiar with:

Lease Rate

This refers to the annual cost per square meter of an industrial real estate. For example, if the lease rate quoted is P160 per square meter, and the warehouse is 10,000 square meter, the rate is computed as follows: P160 x 10,000 square meter which translates to P1,600,000 per year.

To get the monthly rate, simply divide the annual rate to 12 which gives a monthly rate of P133,333.33

Base Rent

This is the minimum lease rate for rented properties where costs of improvements as per specifications needed by the tenant are not included.

Triple Net Lease

This lease is only applicable with commercial real estates and not with residential real estate.

Triple net lease means that the tenants have to pay the prorated share of operating expenses such as taxes, insurance for the building, property tax, general repairs and maintenance, landscaping, property management fees on top of the basic rental rate.

The only costs shouldered by the owner is the structural cost which includes repair of broken roof, pluming and anything that is on the building itself.

Gross Lease

This refers to all the costs the tenant is required to pay. This is where the net charges and the additional rent is paid at a flat sum.

Utility Costs

This is the costs of operation such as the electricity, water and other costs from additional rent.

Lease Term

This is the duration of rent according to the contract agreed by both the lessor and the lessee. The longer the duration, the better for both parties.

Longer duration means more income for the lessor and less cost for the lessee since moving to a different location and establishing a new facility is more expensive.

Lease Agreement

It is a contract between the lessee (owner) and the lessor (tenant) where both party agrees that a property will be rented by the lessor to be dully paid at an agreed amount to the lessee including other legal agreements concerning the property.

Operating Expenses

These are all the costs used for the property. To mention some: real property taxes, property insurance, landscaping, building maintenance, and all mechanical and electrical systems. In this case, the tenants are the ones who pay the utility costs.

Pro-Rata Share

Pro-rata share is the total space that the tenant leases. It is the total space that the tenant is required to pay.

Leasehold Improvements

These are improvements that are specifically needed by the tenant. Lease Agreement does not often include costs for improvements. These costs are often incorporated in the monthly lease.

List of Best Industrial Parks in the Philippines

Clark Freeport Zone

Clark Freeport Zone is located in Pampanga. We can find a variation of businesses, industries, aviation, education and tourism. There are also different kinds of leisure, fitness, entertainment and gaming center of Central Luzon.

Carmelray Industrial Park 1

This is located in Canlubang, Calamba, Laguna. The facilities are designed to cater light and medium sized locators. Tenants can find the Special Export Processing Zone.

This is where investors and locators avail of import and export documentation as well as tax incentives.

Hacienda Luisita

Hacienda Luisita can be found in Tarlac, Philippines. It is a large sugar plantation at 6,453 hectares. This size is as large as Makati City and Pasig City combined.

Authority of the Freeport Area of Bataan

The Authority of the Freeport Area of Bataan is the fastest growing freeport in the Philippines. They are known to have the highly skilled manpower who are capable of supporting operations in manufacturing, semiconductors and electronics, shipbuilding, logistics, BPO, energy and tourism.

Science Park of the Philippines

Here is where major multinational companies can be found which includes Procter & Gamble, Unilever, NEC, NXP and ST Microelectronics, First Sumiden, H.B. Fuller, Nippon Paint, Continental Temic, etc.