Industrial

Definition of Industrial Real Estate

In the field of commercial mortgages, industrial real estate is defined as property specifically designed and zoned for business activities involving the production, storage, or distribution of goods. These properties are often located in specialized industrial parks or near major transit corridors and are characterized by their utility-focused design rather than aesthetic appeal. From a lending perspective, industrial assets are often categorized by their functionality and the specific infrastructure they provide to a business operation.

Key Categories of Industrial Assets

When underwriting a commercial mortgage, lenders distinguish between several sub-types of industrial property, as each carries a different risk profile:

• Warehouse and Distribution: These are large, open buildings used for the storage and movement of goods. They are essential for logistics and e-commerce, typically featuring high ceilings and numerous loading docks to facilitate the movement of tractor-trailers.
• Manufacturing: These facilities are equipped with specialized power, water, and ventilation systems to support the assembly or creation of products. Heavy manufacturing usually involves significant machinery and specialized floor loads, while light manufacturing is less intensive and more adaptable for future tenants.
• Flex Space: A hybrid property type that combines warehouse space with a significant portion of office space (typically 25% or more). This allows a business to operate its administrative headquarters and its inventory or production from a single location.
• Cold Storage: A highly specialized warehouse equipped with industrial-grade refrigeration and insulation for the storage of food, pharmaceuticals, or other temperature-sensitive products. These assets often command higher valuations due to the significant cost of the specialized equipment.

Commercial Mortgage Underwriting Considerations

Securing a commercial mortgage for an industrial asset involves a detailed review of the property’s physical attributes and the tenant's operational stability. Lenders evaluate several specific factors:

• Ceiling Clear Height: This refers to the distance from the floor to the lowest hanging overhead obstruction. Modern industrial tenants typically require "clear heights" of 30 feet or more to maximize vertical storage capacity, making these properties more attractive to lenders.
• Environmental Risk: Because industrial sites may involve chemicals or heavy machinery, lenders almost always require a Phase I Environmental Site Assessment. This study ensures there is no soil or groundwater contamination that could impair the property's value or create legal liability.
• Loading Capacity: The number and type of loading docks (such as dock-high for semi-trucks vs. grade-level for vans) significantly impact the property's marketability. A lack of adequate loading access can make a property harder to finance.
• Tenant Credit and Lease Structure: Industrial mortgages are often underpinned by Triple Net (NNN) leases, where the tenant is responsible for real estate taxes, insurance, and maintenance. Lenders favor "credit tenants"—large, financially stable companies—which can lead to more competitive interest rates and higher Loan-to-Value (LTV) ratios.

In the current market, industrial properties are considered one of the most resilient asset classes. The continued growth of global supply chains and the need for "last-mile" delivery centers have made industrial mortgages a preferred choice for institutional and private lenders alike.