Medical Investor looking to diversify into Industrial
Looking to diversify into a 500k-900k SF Industrial spec investment after primarily dealing with NNN medical properties for the past 10 years. Prior to the medical properties, we ran student rentals for 20 years. We're a family owned, long-term hold portfolio rather than flippers. We currently have 23 properties in medical &amp; retail/office types.

Would the reddit community have any particular guidance on our position? Not looking for a "do or don't", but some things to look out for in operating and management differences. I'm particularly interested in lease structure of gross leases, as we don't have as much experience with that type. This was proposed by some local leasing brokers, so we will be working with them in obtaining and structuring any potential lease. Any resources that you could direct me to would be appreciated as well. 

I've gotten the majority of my market research from CB &amp; Cassidy and it looks very positive for the Industrial sector. I'm concerned about doing a spec project, as every investment proposal we have looked at up to this point has hinged on the lease. Any tips on this outlook would help as well.

We're fairly conservative in nature, so a spec deal normally wouldn't pique our interest, but given the strength of the market, it sounds great. Is this market data just smoke and mirrors, or is there more legitimacy to it? I know that medical is still hot and would expect that Industrial is as well, given the growth in online sales over the past 10 years.

TL;DR - Is the Industrial market really as great as the market data suggests? What would be some operating challenges in going from a NNN based management system to Gross? What are you seeing in Industrial lease structure currently (term, tenant responsibilities, etc)?

Thank you.
[{"id": "c94xl11", "text": "I deal with both sectors of medical and industrial and right now both are doing better than the rest.  Short answer: Depending on your market, I would be hesitant to spec build until vacancy reaches the specific vacancy threshold where new construction would be in demand.\n\nWe're seeing third party logistic companies saying they have more freight  than they can sell, which shows a positive sign in the manufacturing, warehousing, freight, and logistic markets alone.  \n\n\nThat being said I can expand on your question:  \n\nI dont know if you're contemplating large big-box industrial needs or smaller units within the 500-900K SF.  Either way, With 500-900K SF and large occupancy many tenants of that caliber, i.e. 20,000 +/- SF will be savvy enough to understand the NNN system.  The largest advantage of a gross lease in my opinion is the perception to the market. Sometimes smaller tenants do not understand what is all included in the NNN Rent structure.  They tend to have a \"What else am I being charged for?\" mentality. Gross leases offer the most protection to the tenant as they are typically not exposed to an increases to Tax and/or CAM.  Obviously potentially dangerous to you.  With a spec building, you'll only be able to give projected Tax and CAM numbers so offering a gross rate could be bad.  Bad as in; Tax and CAM are actually higher than projected when fully assessed and you suffer the lower net rent, or your rental rate with your higher projected numbers is pricing you out of your competition.\n\nIt is typically easier to manage NNN than gross as you dont have to adjust for a Net Rent and will allow you to sign longer leases without the risk of taxes and/or CAM jumping through the roof. A small population of the market opt for Modified Gross/Modified Net Leases with Base Year Stops.  This allows the landlord to retain their Base Net Rent and pass along increases to the Base Year to the tenant.\n\nTerm:  Depending on the size and requirements, this is all dependent on size.  The bigger the tenant, the longer the initial lease will be.  We typically are seeing 5-7 Years for industrial, whereas you may be more familiar with 5-10 year leases in medical.\n\nWe are fine underwriting deals around 3 years as long as there isn't too much tenant improvements.\n\nTenant Responsibilities: Mid to Large industrial users are easiest to manage.  Not as much interior infrastructure and building mechanical as medical spaces and typically they have a HVAC clause that they are to service the HVAC units biannually.\n\nHVAC, Parking, and any Roof penetrations will be your largest concern depending on the user.\n\nMarket knowledge:\n\nTo elaborate on my perception of the market, you will have to see what the net absorption was in 2012 and why you need to spec a building in 2013-2014.  Is there a shortage of crane, high power/ceiling, flex buildings in your market?  We don't anticipate new construction to be coming back until vacancy is roughly 10% or unless its a build to suit opportunity.\n\nThe thing that these reports dont elaborate on is consumer confidence and current employment levels.  Companies like Caterpillar are still laying people off and \"cutting the fat\" as all companies are (or should be) looking to their bottom line to see where they can run leaner and more efficient in the future.  Industrial will be stronger, but this strength will be slow with small positive gains for the next 5 or so years...as people are saying in our industry.\n\nConsumer confidence is tough too as many larger industrial owners such as Prologis, ING, RREEF, First Industrial, etc. all know these reports and CB and Cassidy all represent these institutional owners.  They understand the market and are willing to drop their rates or give into some market concessions to keep tenants in order not to lose them to another building. \n\nWhat we also dont know is all the defaulting loans that are out there from the smaller owner/users that will influx the market vacancies.\n\nI would be happy to go into detail on any of this or answer any additional specific questions you have.\n\n", "replies": [], "depth": 1}, {"id": "c957sc5", "text": "Jsshabitat's is great. I'm not going to coolest on leases, even though that's what you asked for, I have just one point I want to make. It sounds like you want to get development and then be a landlord, vs simply buy into being a landlord. Thats awesome, development takes cahonies. Though, if you're in an area like Atlanta or Houston where growth is easy to come by, development might not be what you hope it to be. The higher rents the nation is currently experiencing in industrial will be shorter lived in these areas. But if you're in an area like LA/LB, Chicago, or even Charlotte where growth is harder to come by, go for it! Build high ceilings, big bay doors and with lots of turning radius for the trucks. \n\nGood luck!!", "replies": [], "depth": 1}, {"id": "c96rsla", "text": "Rei-CPA - here's an article about what you asked. \n\nhttp://www.globest.com/news/12_573/national/industrial/Sector-Spotlight-Industrial-331651.html?ET=globest:e37800:43673a:&amp;st=email&amp;s=&amp;cmp=gst:National_PM_20130401:editorial\n\n", "replies": [], "depth": 1}]