INDUSTRIAL CONDOS OFFER INVESTORS FLEXIBILITY TO LEASE OR SELL

Written by: Michael J. Metz

Taking a flexible approach to real estate investment makes a great deal of sense in today’s market environment, especially for investors who might like to buy and hold, but realize that the market may dictate a quick sale. That situation is well illustrated by the relatively small industrial condominium building that we at Krusinski Construction Company currently are building in the Huntley area.

Like many of today’s real estate investors, the group developing the Huntley building would love to create a portfolio property that could generate a solid rate of return for years to come. For that reason, the investors selected the location building with an eye toward maximizing its rental potential. Situated in the Bernat Industrial Center along Ill. Hwy. 47 close to I-90, it is in an area where residential development is occurring at a breathtaking pace but where industrial development has been limited primarily to large facilities for major companies.

In planning a building of slightly more than 30,000 square feet that is divisible into units as small as 3,000 square feet, the strategy is to create a property that appeals to the small-business owners who are moving to the new residential communities nearby.

The availability of such a facility will allow those business owners to keep their operations close to home. At the same time, the building can meet the needs of companies interested in moving to the Huntley area to serve its growing population.

Even as they positioned the new building for successful leasing, the Huntley investors recognized that achieving the per-square-foot rents that will meet their financial objectives might be a challenge at a time when leasing demand has been restrained by continuing weakness in manufacturing. In such a situation, it pays to have a solid exit strategy if leasing goals aren’t met, and the decision was made to develop the new building as an industrial condominium.

By taking that route, the investors now have profitable alternatives that complement each other nicely: If the building can be leased at attractive rents, the investors can retain the asset and enjoy the income stream it generates; On the other hand, if the leasing market can’t meet their objectives, all or part of the building can be sold to either users or other investors; Marketing industrial condominium space is being facilitated by the currently low level interest rates, which makes it easier for many businesses, especially smaller ones, to consider owning their space rather than leasing it.

Moreover, targeting small space users has a compelling logic. Many would like to own the warehouse/office space they use each day but find the opportunities to do so are limited. Small, stand-alone buildings often are obsolete, poorly located or simply too expensive. Vacant industrial land in a top location rarely comes in parcels small enough to be affordable for a company that needs only 2,000 to 6,000 square feet.

Owning the space in which they do business also permits the owners to take advantage of certain tax benefits. By owning the space personally and leasing it to their business, an owner can turn corporate income into personal income, which typically is taxed at a lower rate. An owner also can shelter at least some of that income by utilizing the depreciation deductions that such an asset offers.

The investors developing the Huntley property also decided to construct the building in a manner and at the high quality level that makes it maximally adaptable to either the lease or sale scenarios. In the current market environment, that flexibility may well be the most important ingredient.

The building will consist of nine units, ranging from 2,500 square feet to 3,600 square feet, each with its own 200-amp electrical panel and utilities. These units can be sold individually or in multi-unit clusters, but are primarily intended for companies requiring 3,000 to 6,000 square feet. To offer added flexibility, however, it is possible to divide a 3,000-square-foot unit in half, creating two 1,500-square-foot spaces.

Each unit is planned to accommodate up to 20 percent office space and will have its own office entrance. However, we anticipate the actual percentage devoted to office when the building is fully occupied will be more in the 5 percent to 10 percent range.

The major common element in the building is an interior truck dock that connects via a feeder aisle to all nine of the 3,000-square-foot units. In addition, each space has its own drive-in door so a business can move equipment in and out of its space easily or park a truck indoors over the weekend. The pre-cast concrete building will be fully sprinklered and well insulated. Its 21-foot clear height will facilitate warehousing operations.

Parking is being maximized, with nearly 30 more spaces than required by the local building code. The surrounding grounds will be extensively landscaped to emphasize the quality of the project.

In finalizing the design of the building, the objective was to provide a facility that delivered a higher level of quality than prospective tenants/buyers were likely to find in competitive properties. This would not only help rent the building, but would be especially important if the investors decide to sell the property as a condominium.

Should the investors retain the building in their portfolio for a number of years, the eventual sale will be made easier by erecting a top-quality industrial structure.

A final touch that should help the building find its niche in the current market, either as a rental property or one offered for sale, will be the completion of a model unit. One 3,000-square-foot space will be fully built out so that prospective tenants or buyers can more easily appreciate the potential of the space.

From an investor, perspective, however, it is the flexibility of the building that makes it attractive. Whether leased or sold or some combination of the two, it is geared to meet the needs of the small businesses that are its target market in a way that should assure it remains a desirable industrial property for years to come.