Management Strategies for Industrial Real Estate Risks: What Investors Need to Know About Real Estate Investment Risks

Articles / June 19, 2024
Industrial Real Estate Risks

Understanding Industrial real estate risks should be one of the first things every real estate investor should consider. With the recent entrepreneurial surge, causing new businesses to break forth daily, industrial and commercial real estate is more attractive than ever, drawing in many extremely forward investors. However, these real estate investors often neglect the risks associated with industrial and commercial properties. To avoid significant financial risks in real estate, it becomes essential to understand how industry titans manage economic risk in property investment, empowering you with the knowledge to make informed and prepared decisions.

Chris Kamberis, a seasoned real estate investor and respected business manager, has identified various risks for commercial real estate investors and provided invaluable risk management insights. With a keen focus on industrial real estate, his extensive expertise has equipped several investors in the industry with the necessary tools to navigate these risks, instilling confidence in their investment decisions.

While reading this article, you will gain a comprehensive understanding of the types of risk associated with real estate investment and the best risk management strategies for industrial and commercial real estate. This knowledge will empower you to make informed and prepared decisions, mitigating potential risks and maximizing your investment potential.

Industrial Versus Commercial Real Estate Risks

Avoiding Industrial Real Estate Risks

Despite their surface-level similarities, industrial properties are distinct from commercial properties. Industrial real estate refers to properties used explicitly for industrial purposes, such as warehousing, factories, research, development, manufacturing, and distribution. These properties are typically located in areas with good roads and sustainable facilities.

On the other hand, commercial real estates are properties used for commercial/business purposes. These properties are leased out to tenants. In turn, tenants using the property pay rent to the actual owner, depending on the agreed amount. Commercial real estate includes many property types, such as shopping malls, hostels, school buildings, retail stores, etc. Commercial real estate value is also affected by location, market demand, and economic conditions.

Although industrial and commercial real estate are different, they have similar property investment risks and opportunities.

Most Common Industrial Real Estate Risk

  1. Financial Risk
  2. Market Risk
  3. Legal Risk
  4. Operational Risk
  5. Environmental Risk

Financial Industrial Real Estate Risks

Real estate finance and investment risks and opportunities refer to the factors that limit investors from meeting their expected financial returns. Often, many investors either lose their capital or fail to meet targeted profit. In other cases, they make very slim or no profit due to higher interest rates, tax rates, unnecessary repair of industrial properties, or higher operating costs. These factors cause extreme expenditure and lower rental profits. Most of the time, these financial risks are due to unforeseen circumstances beyond the investor’s capability, while on other occasions, they are caused by the investor’s negligence or carefree behaviors.

General Real Estate Market risk

Market risk real estate results from the industry’s dynamic nature. If investors do not adapt to the current changes in the market and environment, they risk paying the ultimate price. Market risk is the possibility that the value of industrial property will depreciate due to constant changes in society, including economic, social, environmental, and political changes. These risks can emerge from a recession, natural disaster, crime wave, or a new zoning regulation.

Legal Risks Associated with Industrial Real Estate

managing industrial Real estate investment risks 2024

Every industry has its guiding regulations, which are different in various jurisdictions. Since no globally unified laws guide real estate, legal compliance can be a problem. Most of these risks get real estate investors who are not conversant with the laws of their jurisdictions into a big mess.

When they violate these laws and regulations, the tendency to waste resources on endless lawsuits increases. For instance, a dispute between clients and investors can erupt if they have no explicit written agreement on handling property damages caused by industry activities. In other cases, these tenants can sue the investor if he breaches their agreement negligently. There are other instances where legal risk can come into play, including issues with contracts, torts, titles, permits, and zoning.

Operational Risks of Industrial Real Estates

These risk categories refer to the possibility of encountering problems related to the maintenance and management of the property, such as theft, fire outbreak, vandalism, water damage, pest infestation, or tenant turnover. Operational risk can also occur where there is poor management expertise. Where these problems arise, expenses and losses are inevitable, affecting investors.

Environmental Risk of Industrial Real Estates

Natural or artificial disasters could affect industrial properties, raising environmental risks. Natural disasters include floods, earthquakes, landslides, wildfires, and pollution. Artificial disasters can consist of atomic bombs and missile wars, which can destroy buildings.

Industrial Real Estate Risk Management Strategies 2024

balancing industrial Real Estate Investment Risks

Chris Kamberis, the industrial real estate giant of Kansas City, was particular in outlining strategies investors must leverage to avoid the risks of investing in commercial real estate. According to him, keeping up with recent industrial and commercial real estate risk management trends can effectively reduce the dangers of real estate investing.

Here are some of the most effective ways to manage industrial real estate risks in 2024

Due Diligence in Identification of Potential Industrial Real Estate Risks

In industrial real estate, effective risk management starts with rigorous identification and comprehensive evaluation of potential threats within the property or premises intended for industrial operations. Ongoing surveillance is essential to preemptively address issues impacting the property or prospective clients engaging in business activities. Managers typically categorize potential risks into two main groups: physical and environmental hazards. Physical hazards encompass conditions like slippery floors or uneven surfaces, while environmental risks include scenarios such as fire outbreaks, water leakage, or inadequate ventilation.

Zero Risk Real Estate Planning

Every investor should draft an emergency plan to implement in situations threatening life and property. The plan must outline the necessary steps to follow during emergencies. Additionally, industrial real estate firm employees and agents should receive training to manage risks effectively. For instance, they should learn how to use a fire extinguisher in case of a fire.

Investment Diversification as an Industrial Real Estate Risks Management Strategy

A diversified real estate portfolio across several industrial property types and jurisdictions remains an effective strategy for low-risk real estate investment. A diversified portfolio also solves liquidity risk in real estate since revenue isn’t concentrated in one place. Hedging real estate risk with a diversified portfolio seems to be the only escape from the perceived global bubble index. Investors can rely on this strategy to mitigate the impact of market fluctuations and localized economic downturns.

Savings and Reserves for Maintenance

Managing Industrial real estate risks can be capital intensive as unexpected expenses are often demanded. Issues can arise at any point; hence, as a real estate investor, you should always be financially prepared to surmount the unexpected. These issues include maintaining a vacancy period, renovating, and maintaining property.

Facilities and Technology Implementation for Managing Industrial Real Estate Risks

Technology plays a vital role in managing risk related to industrial real estate. As stated earlier, there should always be a fire extinguisher to aid in stopping or intending a fire outbreak. Some sensors help dictate dangers like gas leaks, temperature anomalies, etc. All these technological upgrades need to be considered when managing industrial real estate.

Keeping an up-to-date Market Insight

It is paramount that investors review and update knowledge gaps in industrial real estate. Investors should rely on economic risk in property investment indicators, interest rate risk in real estate, and local market conditions.

CONCLUSION

Strategic management of industrial real estate risks is critical as it ensures low-risk property investment while reducing investors’ liabilities. Although these risks are usually inevitable, identifying and assessing them can help increase real estate profits.

Above all, it’s necessary to hire industry experts to guide your decision-making processes and scale profits.