Industrial Property

Definition of Industrial Property

In the context of commercial mortgages, industrial property is a category of real estate specifically designed or repurposed for the production, assembly, storage, research, and distribution of goods. Unlike retail or office spaces, industrial properties are valued primarily for their functionality, infrastructure, and proximity to transportation networks. For lenders, these properties represent a vital asset class characterized by long-term leases and lower tenant turnover, though they require specific underwriting considerations regarding environmental risks and specialized use.

Key Categories of Industrial Property

Industrial real estate is not a monolith; it is divided into several sub-types that influence how a commercial mortgage is structured and priced:

• Warehouse and Distribution: These facilities are used for the storage and movement of goods. Lenders favor these assets due to the rise of e-commerce. Key value drivers include clearance height (the usable vertical space), the number of loading docks, and access to major highways.
• Manufacturing: Buildings equipped with specialized power, water, and ventilation systems for the creation of products. Because these facilities often contain heavy machinery and custom layouts, they are sometimes viewed as special-purpose properties, which may impact the loan-to-value (LTV) ratio.
• Flex Space: A hybrid property type that combines industrial warehouse space with a significant portion of office space (typically 25% or more). These properties are popular with small businesses and technology firms that require both a physical workshop and administrative space.
• Cold Storage: Specialized warehouses designed with refrigeration and freezing capabilities for the food and pharmaceutical industries. These assets are high-cost and require specialized appraisals due to the extensive internal climate-control infrastructure.
• Research and Development (R&D): Facilities used by life science or tech companies for testing and creation. These often feature high-end laboratories and specialized utility requirements.

Industrial Property in Commercial Mortgage Underwriting

Securing a mortgage for an industrial property involves a detailed analysis of the asset's physical characteristics and its income-producing potential. Lenders focus on the following factors:

1. Environmental Due Diligence: Because industrial sites may involve the use of chemicals or heavy manufacturing, a Phase I Environmental Site Assessment is mandatory. Lenders must ensure there is no soil or groundwater contamination that could impair the collateral's value or create legal liabilities.

2. Debt Service Coverage Ratio (DSCR): Lenders calculate the DSCR to ensure the property generates enough net operating income to cover the annual mortgage payments. Strong industrial properties often boast stable cash flows due to the "triple net" (NNT) nature of many industrial leases, where the tenant pays for taxes, insurance, and maintenance.

3. Functionality and Obsolescence: A key risk in industrial mortgages is functional obsolescence. If a building has low ceilings (less than 20–24 feet) or inadequate truck turning radiuses, it may become difficult to re-lease if the current tenant leaves. Lenders prefer "modern" industrial standards that appeal to a wide range of logistics users.

4. Location and Logistics: The value of industrial property is heavily tied to its location. Proximity to "last-mile" delivery hubs, major shipping ports, rail lines, and interstate corridors reduces the risk for the lender, as these locations remain in high demand regardless of broader economic shifts.

5. Tenant Creditworthiness: The financial strength of the tenant is a major factor. A mortgage for a building leased to a national credit tenant (like a major retailer or global logistics firm) will often secure more favorable interest rates and higher leverage than a building leased to a local, unrated business.