When we talk about activity in Cincinnati’s real estate markets, you’ll sometimes hear the term “property speculation,” or a similar iteration of that term, used. In general, the word “speculation” brings to mind an air of uncertainty, guessing and positing, because it’s basically just a fancy term for guesswork. But how does this term apply to industrial real estate? There’s no way we’re guessing about million-dollar commercial construction projects, are we?
Yes; we are. But it’s not as simple as taking your best guess and hoping things pan out the way you think they should. Just like any sort of real estate investment, there’s got to be some guesswork and hypothesizing involved. But it’s not risky moves based on blind hope for the future; property speculation involves deep-dive research, analysis and projection. Speculation is why people don’t buy houses in dead neighborhoods or 1-year floodplains. And it’s also why investors choose or choose not to undertake a massive industrial construction project in a commercial property market with no potential.
And to make it a bit more confusing, you’ll also hear the term “spec buildings” or “industrial spec buildings.” A speculative build, in industrial real estate, is when a real estate development firm constructs some type of industrial property for the sole purpose of immediately selling or leasing it once it’s completed. So, a market analysis with favorable projections (read: speculation) might lead investors and developers to invest in constructing a speculative building.
Property speculation is an integral part of our process in many of our clients’ projects. Let’s break down exactly what goes into creating a solid commercial real estate hypothesis:
Industrial Real Estate: Hypotheticals & Cash Flow
All types of investments include speculation. They have to; no one can look into a crystal ball and tell you exactly what will happen next in a given real estate market. But we take several measures to optimize the quality of our predictions. The goal is to take advantage of the current industrial real estate market, as well as where it’s headed in the long term.
But first – what types of property are we talking about when we refer to industrial properties in the Cincinnati region? A few common types include:
- Industrial-zoned land for sale (Class A, B and C)
- Warehouses and distribution centers
- Office spaces for research and design
- Manufacturing facilities
As a comprehensive commercial real estate development group, we might acquire industrial land and construct a property, syndicate the land, or build-to-suit and lease an industrial building. But consider the size of any of these undertakings. This isn’t a $200,000 investment to build a single-family home; this is a millions-of-dollars investment and a commercial construction process that could be on a year or years-long timeline.
As such a sizable project, investors and businesses need to have all their ducks in a row before buying that empty acreage or constructing a spec building in one of our business parks. And all parties have to feel safe doing it. One of the reasons we’ve become such a staple in Cincinnati’s and Northern Kentucky’s industrial real estate markets is because this type of analysis is something we were built on when we were founded over 80 years ago. And just like our founders saw the potential of commercial land in our region, we continue to see the potential and take advantage of it. It spurs our growth as well as the growth of commerce in our area.
What’s the secret ingredient to our guessing skills? Informed risk management.
Risk Management in Commercial Real Estate Investment
In Southwest Ohio and Northern Kentucky, we’ve got a pretty good idea of where industrial property values are headed, which is why industrial spec buildings in our region are on the rise. Managing risk in real estate speculation is easier here than in other regions because of this. Why?
- E-commerce: As e-commerce companies like Amazon become the virtual version of Wal-Mart, distribution centers are only going to become more integral to regional and national commerce. Land that’s simple to develop, a location that’s amenable to Midwest, Mid-Atlantic and Southeast markets, and access to an international airport all make Southwest Ohio and Northern Kentucky prime areas for development.
- Demand for warehousing: Warehouse vacancies are at an all-time low – in-part because of the e-commerce boom. This means that newly-constructed spec buildings, especially in a growing region like ours, are likely to be sold or leased immediately upon completion as property markets grow and prime locations become scarce.
- Manageable Maintenance: Industrial properties require less upkeep than other types of properties like residential developments or retail spaces.
- Property Variability: Because there are so many types of industrial properties to construct, sell and lease, investors and real estate development firms can create a diverse (read: more stable) portfolio just within the realm of industrial real estate.
However, because we don’t have that crystal ball, there is always some level of risk lurking in the shadows of any type of industrial real estate investment:
- Oversupply: While it’s widely agreed upon that hundreds of millions, if not billions of warehousing square-footage will need to appear in growing industrial regions just in the next few years or so, there’s always a chance that, in the attempt to take advantage of a quickly-growing market, too many players will enter the race. If there becomes too much industrial land or too many spec buildings on the market, property values decrease.
- Vacancy: With these kinds of investments, we’re looking at the long term – 5, 10, 20 years ahead. Regardless of how things look like they’re going, anything can happen. And if you undertake an industrial construction project and then there’s an issue like oversupply, a vacant building becomes a money pit.
- Market Crash: We all learned the potential of catastrophic market disruption during COVID. While our region still saw growth in big businesses entering our industrial and commercial property markets, as well as small businesses expanding, there’s always risk that the next nationwide disaster won’t be so kind.
- Long-Term Nature: Leases for warehouses, industrial office spaces, and manufacturing facilities aren’t like 1 or 2-year leases on apartments. Often, we’re dealing with 20 or 30-year leases. What if a tenant’s business goes underwater and they can’t pay the rent? Then investors are left on the hook for all that lost money.
The Science of Speculation in Industrial Real Estate
If you look at property speculation as akin to the scientific method, you’ll notice that the quality of your guess (read: hypothesis) is based on the quality of your market research and projections (read: testing) as well as the analysis of said data (read: analysis and conclusion). So, the key to effective property speculation, and the key to constructing industrial spec buildings that are sure to benefit investors and businesses, is a skilled and experienced eye that is familiar with the long-term patterns of growth and retraction in a given real estate market. Yet another great reason to let a local, comprehensive commercial real estate firm like ours take as much of the guesswork out of the process as possible.