Industrial v's Commercial

[Don and Liz]

My experience is mostly in residential property so I have a beginner type question that I would like help with from those who regularly buy in this sector.

The question is this: What yield difference would you expect from an industrial and commercial property.

There will be many factors in play.

If you could somehow equalize these factors and get a comparablly ranked property from each what would your expectations be.

[OllyN]

In Reply

Don and Liz

Your question isn't clear enough
"Commercial" property covers all types of non residential investments.

The main catagories are
retail e.g. shops
office
Industrial e.g. factories

Then you have those which are a mixture of them all.

I am guessing you want to know the different yields from factories as compared to shops as compared to offices.

Post a better definition and I will be happy to assist.

[Don and Liz]

Yes olly - I was thinking about Retail space v's factories
and office space v's factories and retail space v office space?

[OllyN]

Ok

You won't be satisfied with my answer because making these sorts of comparisons requires some hard facts about each individual deal.
A lot depends on the strength of the leases and the tenants, the location, the condition, market trends etc
But if we take a perfect model with a strong tenant, a good lease and a good location we would probably find
that a top industrial will have a 7-8% yield . A top retail might have a 6-7 1/2% yield and a top office about 8-9% yield.
The other extreme with dodgy tenants, poor leases or vacant etc then yields might be: industrial 11-14%, retail 9-12% and office any number you like.
But as it's almost impossible to compare apples with apples as it would have to be worked out on a case by case basis.
PM me or email me direct if you want specific advice on a specific property.

[Don and Liz]

thanks olly

[Glenn]

Don and Liz
My opinion not as a major buyer of properties but as a " Mum and Pop investor" might actually give you some clues. We started out 15 years ago with a fringe city warehouse / showroom. The same tenant is still there and the tenant and I have always had a good relationship. Despite all the hype over the interviening years the rent on this property is still not quite up 50%.
I have another small pure industrial workshop / office. The rent on this one is almost double over 13 years. I have never the less had some vacancies occassionally. The longest was 6 months and the most recent was about 4 months.
Compare that with a retail investment close to a mall.
This has been held for half the time of the other ones.
The rent on this has grown almost double. One change of tenants had two offers to rent it on the same day resulting in nil vacancy.

The tenants in the first one are a national branch network. Never any problem about paying and lease details.
The pure workshop has had its dramas (nothing like residiential but still dramas) The tenants tend to be local and not familar with leases and ways of operating. They think of the lease as a sort of residential thing. I can not be bothered being the big bad landlord. Much easier to do things for them that other commercial landlords would not bother with like spraying the weeds on the site and so on. Costs nothing to very little and I can always drop in for a cup of coffee or free beer.

Most beginners start with industrial because of the cost thing and apparent simplicity. In my opinion if you want to get into industrial investments you need to be able to talk the same talk as them. No point in being the big guy. You have to understand where they are coming from and understand that many workshop activities do not make lots of money.

For the retail it is all business. They become hysterical when somethng happens that affects their business.

The banks run hot and cold on commercial of all classes. You are in a much smaller market and the risks for them is far greater. By far greater I mean they know that the value is linked to the tenant and they have seen their share of problems compared with the great grey mass of residential.

Hope that gives you some clues.

[xris]

For the retail it is all business. They become hysterical when somethng happens that affects their business.

I think it was Mr Jones who is pretty damning of retail tenants, especailly compared to the simplicity of industrial.

I believe the usual steps are...

Commercial
Retail
Industrial
Residential

xris

[Don and Liz]

thanks

thanks, also very helpfull. Glen did you mean that to be a successful landlord it is better to "understand" the tenants business or more generally being able to relate to the tenant on a human level. I am not sure how hands on I would want to (or should) be.

[Davo36]

I think it was Mr Jones who is pretty damning of retail tenants, especailly compared to the simplicity of industrial.

I believe the usual steps are...

Commercial
Retail
Industrial
Residential

xris

These steps being from bottom to top I assume?

[Davo36]

I think it was Mr Jones who is pretty damning of retail tenants, especailly compared to the simplicity of industrial.

xris

Yeah he said rather than send criminals to jail we should make them the landlord of a small block of shops for a year or 2 - that'd teach 'em.

I once did the leasing for a new block of shops when I was an agent. 4 of them. Nearly put me in a straight jacket. All the infighting. "I should be the only one selling (insert bread/milk/gifts/stamps) etc.". I'd hate to have to manage them, but I guess people do.

Retail has done very well over the last few years, but prior to that, it wasn't anything special. This will come around again I reckon.

[Glenn]

thanks, also very helpfull. Glen did you mean that to be a successful landlord it is better to "understand" the tenants business or more generally being able to relate to the tenant on a human level. I am not sure how hands on I would want to (or should) be.

I a not sure about success or understanding.
I have had tattooists, sheetmetal workers, debt collectors, electricians, and spagnum moss processors. Not too sure it is necessary to understand people.
Rather if you are a smart *** city slicker in a clean suit with a calculator stuffed in you pocket they will think you are ripping them off. A lot of tenants will not only choose the property they will also ask around and choose the landlord. This is very different from retail tenants.

[Don and Liz]

if you are a smart *** city slicker in a clean suit with a calculator stuffed in you pocket they will think you are ripping them off

not sounding so good for cbd accountants

[Glenn]

not sounding so good for cbd accountants

Exactly. Stick to residential or retail / offices in cbd areas near to where the civil servants hang out.