What Business Owners Need to Know About Industrial Real Estate

Looking into Industrial Real Estate?

The U.S. economy naturally has its ups and downs, but a growing business may not have time to wait for an incline to expand its operating space. An organization looking to increase space or relocate must consider: 

• Whether to buy or lease 
• Space needs and requirements  
• Rate of growth
• Tax incentives and environmental regulations 
• Location and logistics 

With so much to consider, where should a growing business start?  

That’s where Richard Mason can help. He is the Vice President of MLB Commercial Real Estate, a Houston-based real estate company specializing in commercial real estate and development. Working in the industry for a decade, he has experience in land, industrial, and retail transactions. He shares his expertise and guidance with us to help inform business owners about the considerations that come with expansion. 

Meet Richard 

A Houston native, Mason began in finance but graduated with a degree in real estate from the University of Mississippi. Real estate is the family business—his father started MLB Commercial Real Estate in 2020 with a longtime business partner.  

Mason interned and later worked for industry experts early in his career. He gained experience as a land broker selling to industrial and residential developers. After some time at a national firm, he joined his father’s new brokerage firm and is responsible for sourcing and analyzing new acquisitions. The team at MLB has 75 years of combined experience working in land brokerage and industrial leasing.  

Mason’s first deal in industrial was with a small company looking to expand. The company needed more storage space, foreshadowing the current market’s need for storage and warehouse space thanks to the e-commerce boom. He learned the importance of working with cost-conscious clients and how crucial location is for logistics. 

More than Just Location, Location, Location 

For those new to industrial real estate, there’s a significant difference in how you approach buying or leasing for an industrial business versus looking at commercial or residential real estate. For the latter two real estate industries, it’s all about location, location, location. That’s not untrue for industrial, but it is more complicated.  

Industrial buyers look at a location for employee benefits and logistics, looking at proximity to major roadways, railways, and ports for product accessibility and delivery. They also must consider a city’s zoning and its environmental limits, which vary from area to area. Industrial zoning is a local law placed on land usage and is important for city planning to ensure environmental and residential safety, and utility capacity. Location is also a factor thanks to tax incentives. Mason has conducted deals in the various counties surrounding Houston, including Fort Bend County, which sometimes offers tax incentives to tenants moving there. With expertise comes inside knowledge clients can benefit from. 

Beyond the location legalities a business needs to consider, deciding whether to buy or lease is another decision that isn’t cut and dry. An additional level of complexity is the requirements your business needs in terms of machinery or customizations. Understanding the unique needs of industrial businesses, the needs of developers who service them, and what they provide their tenants is key to his firm’s success.  

The Industrial Real Estate Market in 2024 

The Houston market has seen a boom in rental growth due to increased construction costs tied to inflation. While retail rents have seen significant growth over the past 10 years and remain high, these industrial rents vary greatly. 

Industrial manufacturing and bulk warehousing have rents that can be interchangeable throughout the city, usually within 10-20% of each other. Mason has been surprised by how closely aligned Class B and C spaces have been lately, leaving businesses to focus more on other cost factors. There are many factors other than Class that can affect rental rates, including clear height, truck accessibility, and access to stabilized yard/outside storage. A recent trend we’ve seen is the need for Industrial Outside Storage (IOS), which has become a target for many industrial property investors. 

Industrial buildings are classified as A, B, or C based on price, quality, value, and amenities and these vary by area and market.

Mason’s firm sees equity groups from all over the world looking at the Houston area. These retail and residential developers come in with their construction teams and then pick up industrial projects when other markets slow. This is because E-commerce continues to drive the market, with large companies taking up large amounts of square footage to bolster operations. With so many large e-commerce companies securing warehouse space and slowing down build-up, you’ll find a lot of leasing activity at these sites.   

Where’s the Best Place to Start?

You can read about the market yourself, but contacting a real estate broker who is experienced and familiar with your area will save you time and money. They will understand the due diligence required before committing to buying or leasing a new space. A good broker will know an area’s zoning and laws, plus have insider information from colleagues, connections, and industry publications to apply to your needs.  

“Real estate professionals are your best resource and should always have your best interest at heart.”  

There’s no additional cost to a tenant using a real estate broker. Developers will underwrite commissions so that they are paid out of the deals. You are looking for a partnership, so interview different brokers to get their opinions and get a feel for their experience and expertise. Mason believes as a business owner, you have a good judge of character, so trust your gut.  

These relationships in real estate can last years, something MLB takes seriously. They run models on what their clients’ rents will look like, reconciling their end-of-year expenses, and reviewing this with clients to guide any next steps.   

Buying versus Leasing Industrial Real Estate 

Mason says, if you have cash on hand and are steady, buying can make sense. He recommends purchasing only when buying big and leasing extra space out for the short term, playing the long game by having space options for growth and making some money back in the meantime.  

Ownership is a point of pride in residential real estate, but more complicated in industrial and may not be practical. Buying means you are locked into a space, so growth can cause stress or the area you are located in may change, affecting expenses or property value. When you own, you do put money in your pocket when you sell your building, business, or both, but it doesn’t pay out for everyone. With leasing, you have more flexibility, and Mason suggests if you are in flux and need cash, go that route.  

The biggest question on buying or leasing is asking yourself where you’ll be in 3 to 5 years. Are you in a rapid-growth moment? With leasing, you can reevaluate your lease in a year or two to potentially adjust what you need, especially with larger developers. You can inquire about nearby spaces and what the potential availability is. 

What To Do If Rent Goes Up? 

If your landlord proposes a significant rental increase at the time of lease renewal, your initial thought may be to move to another space with more affordable rent. It is certainly important to be on the lookout for a more affordable location. However, Mason reminds us to think about moving costs for machinery and equipment first. Is that annual increase higher than that cost and adjustment? Even with developers enticing you to move with deals, the adjustment to a new location can cost upwards of the rent saved. 

For those who own their building, any move or new location requires determining whether you are in a growing market or an already established area. Think of those stories about owners of great businesses losing value due to their location in run-down areas. A real estate broker will have insight into whether the land value is going to appreciate and may shed light on whether cheaper options will pay out in the long run. For tenants, ensure the area is not in decline for safety and security purposes. An area in decline could see increased theft and violent crime, which causes headaches for owners and concern for employees. 

The Best Advice on Industrial Real Estate 

Mason emphasizes the need for a business growth plan and any potential exit strategies when making real estate decisions. This advice covers scenarios beyond your control—things like the economy, changes in your area, business growth, and the need for flexibility. 

When business owners are forward-thinking, they can avert tough and costly situations when it comes to their shops, warehouses, and other operational spaces. Having a real estate professional in your pocket to advise you on what the future may hold can help your business adapt as needed. 

Looking into industrial real estate, whether buying or leasing, is a big step no matter your business’ size or tenure. The biggest takeaway here is that in order to navigate all the details of a new industrial real estate deal, having a broker on your side will make financial sense. This professional can also ensure you have a strong exit strategy, allowing your business the flexibility it needs to succeed.