A major reason why industrial property investments make sense.
Many industrial properties feature a ratio of 90% warehouse space and only 10% office space.
Manufacturers and distributors are often heard to say “we make our money in the warehouse, not the office.” In fact, many company owners consider office equipment, furniture and staff as an unfortunate but necessary overhead cost.
For example, E.J. Basler Company, a family owned manufacturer of precision machined parts based in Schiller Park, needed a satellite manufacturing facility to expand its production to accommodate new orders from its customers. Dennis Basler, one of three brothers who now run the company, originally founded in the 1950’s by his father and their aunt, set out to find a second facility to lease. Dennis found a suitable industrial building on United Parkway in Schiller Park, minutes from his main plant.
Prior to signing a lease for the 20,000 square foot building, Dennis informed the property manager for the owner, Prologis, that the existing 1,500 square feet of office was not needed. The property manager was a bit surprised. Instinctively, as an experienced property manager, she asked Dennis if he would require a fresh coat of paint and new carpet. Dennis responded that the space was just fine “as is.” Dennis told her “we don’t need any office space–we just need the warehouse to install our machines and start producing metal parts.”
“For industrial buildings interior buildout is often a minor upfront cost of leasing to a new tenant while buildout costs for space in an office building can be far more significant,” says Joel Friedland, who’s real estate management firm, Brit Asset Management, has previously handled the leasing and management for both office buildings and industrial buildings.
Office buildout for a 20,000 square foot office space could exceed $30 per square foot, or $600,000, to customize the entire office—including demolition, construction of new private offices, HVAC, paint, carpet and other interior features such as millwork.
In contrast, interior buildout for a 10% office area within a 20,000 square foot industrial property could cost as little as $15,000 for carpet, paint and cleaning the washrooms. Friedland says “office space in a class A or B office building could potentially need to be redesigned each time the space is leased to a new tenant.”
Friedland adds, “Industrial property users are usually much easier to satisfy. Recently, we signed a 3 year lease for a 15,000 square foot building in St. Charles and spent $12,000 to freshen up the office space. No structural changes were necessary.” Friedland, who represents numerous industrial real estate investors, says, “buildout for a typical industrial property is usually much less expensive when swapping out one tenant for another.”
Friedland says, “this is a key reason why industrial property investments are so much better.” He adds, “I know a lot of office building owners—it drives them crazy to spend a fortune each time a tenant vacates and a new tenant moves in.”