What Return on Investment Can I Expect to Get on Warehouses?
September 13, 2023
With the growth of e-commerce across the world, there is a rise in the demand for warehouses and this is not limited to a particular country or state. Warehouses are considered a solid commercial real estate investment for their potential to deliver high and consistent returns.
Warehouse space has been delivering strong results for investors. However, if you haven’t invested in this type of asset, it is natural for you to wonder about the return on investment in a warehouse. In this article, we will explain the ROI of investing in a warehouse space.
How You Can Invest in Warehouses
Investing in a warehouse is very straightforward. If you are looking for a way to get into this asset, we’ll discuss two primary methods that are very common today.
Purchase the Warehouse with Cash or Financing
Many investors like to do it on their own by purchasing the warehouse using cash or through financing. However, it comes with its own set of pros and cons. While the benefits include having no middle men which is directly related to enjoying higher returns on your investment, the other benefit is having complete control of the investment. Whether you make money or lose money, it is all yours. But there are disadvantages to buying a warehouse using cash, one obvious disadvantage is that the total risk is yours and there is a lot more administrative work. If you are ready to take the risk and handle the paperwork, this could be an ideal way for you to invest in a warehouse.
Invest in Warehouses Through an Investment Firm
Investors who are not aware of the ins and outs of commercial real estate investments like to invest through an investment firm. This is a low-risk method of buying a warehouse. You can invest in a warehouse through a Private Real Estate Trust. They have professionals handling investments for you and you do not need to put in the extra work. It also reduces the risk and gets you access to better properties. However, it also comes with a set of disadvantages you should be aware of. One obvious drawback is that you do not have 100% control over the asset and your investment will be limited to the deal that is chosen by the firm.
What is the ROI of Investing in Warehouse Spaces?
Several consumer-focused businesses have increased supply chain investments and have invested in warehouses that reduce costs and help with logistics. The ROI on warehouse investment comes around 10% annually but it is not certain for all warehouses. While the ROI is higher than investing in other properties, the actual return will vary based on several factors. Let us take a look at the factors that affect the expected returns on warehouse investing.
One of the most important factors that affect any commercial real estate investment is the state of the market and economy. Say, a good consumer market will be ideal for warehouses but sometimes a down economy can also be good if the warehouses are used to work with those companies that thrive in such markets.
Size of the Deal
The deal size will have an impact on the ROI of your investment. Larger deals will generate a higher return in terms of the gross cash but it may not deliver higher percentage returns. However, the total cash return could be much higher.
Type of Deal
The deal type will dictate the return on the investment in a warehouse. There are factors like the local market, demographics, and warehouses that are focused on specific industries which affect the return. Even the occupancy structure can have an impact on the return.
Warehouse rents are expected to increase in 2023 and 2024 which shows the potential of higher return on the asset. Depending on the location, size, and market conditions, you can enjoy an above-average return on your investment.