Reevaluating Industrial Warehouse EB-5 Investments

Investing in industrial warehouse projects has long been regarded as a stable and potentially lucrative option for real estate investors. However, recent market dynamics have raised concerns about the viability of such investments, particularly in light of oversupply and increased interest rates. In this blog post, we will delve into why investing in industrial warehouse projects may not be the best idea for EB-5 investors given the current landscape.

The Oversupply Conundrum

It’s essential to understand the context of the industrial warehouse sector. Over the past decade, there has been a significant increase in demand for warehouse space driven by the e-commerce boom, changing consumer behavior, and the need for efficient supply chain management. As a result, investors flocked to this sector, leading to robust development and an oversupply of warehouse properties.

Saturation in Key Markets: Major logistics hubs in metropolitan areas experienced extensive warehouse development. While this initially met demand, it has now resulted in oversaturated markets. Oversupply leads to increased competition for tenants, driving down rental rates and squeezing profit margins for investors.

Vacancies in the second quarter of 2023 were rising, and distribution companies were subleasing unused space at the highest rate in years. “The market is recalibrating, with vacancy expected to slightly rise over the next few quarters as construction deliveries begin to outpace net absorption, reversing the trend of the last two years,” according to the Newmark report, published in mid-July.

Market Vulnerability: Oversupply makes the industrial warehouse sector more susceptible to economic downturns. During times of economic uncertainty, demand for storage and distribution space may decrease, leaving vacant warehouses and putting pressure on investors’ returns.

EB-5 investors should be aware that previous growth in an industry does not mean future success, particularly if past growth has created an oversupply.

Lack of Diversified Tenants

Concentration of Risk: Warehouses often rely heavily on specific industries or tenants which can expose investors to concentrated risk. If a major tenant experiences financial troubles or changes its business model, it can have a significant impact on the performance of the investment.

Warehouses are typically developed based on a market analysis that includes specific target tenants in the local area. If those tenants’ have financial trouble, it can make the warehouse unviable. Real estate investments with the lowest risk will have a diversified base of tenants and buyers.

Impact of Increased Borrowing Costs

Historically High Interest Rates: Interest rates have a significant impact on industrial warehouse development, influencing both the demand and the cost of such projects. Many materials and equipment purchases are financed, and higher interest rates increase these costs, which can be passed on in the development of new warehouses.

Additionally, the value of warehouse properties and the lease rates they can command are influenced by interest rates. Higher interest rates can lead to increased costs for tenants who borrow to finance their operations, potentially impacting their ability to pay higher rents.

When increased interest rates are impacting both cost and revenue of the project, EB-5 investors need to carefully reevaluate the profitability.

Economic Risk

Economic Uncertainty: Global economic uncertainty, including trade tensions and disruptions in supply chains, can influence the industrial warehouse sector. Investors need to carefully consider how macroeconomic factors may impact their investment.

The Wall Street Journal explained in their logistics report that retailers more recently have slowed their leasing as the pandemic-driven surge in online shopping has receded and consumers grapple with inflation.

E-commerce giant Amazon.com Inc., which had doubled the size of its fulfillment network in 24 months as business surged during the pandemic, last year began slowing its logistics expansion and said it would sublease some of its warehouses.

According to Adrian Ponsen, national director of U.S. industrial market analytics at CoStar, “Developers’ profit margins are basically coming under pressure from both sides. At the same time that the hard costs to build these warehouses is rising, the prices that developers think they can ultimately sell them for is beginning to decline.”

Industrial property construction starts tumbled 48% in the first nine months of 2023 compared with the same period in 2022. That was the largest drop for that period since 2009. The cooling market is a headache for investors such as Blackstone, where industrial real estate accounts for a large share of property holdings.

Cyclical Asset Classes: Warehouse revenue and market value is highly dependent on the economy at any given time. EB-5 investors expect a short investment term with their invested capital repaid on-time. However, in a down-market refinancing or selling the property becomes difficult. If developers are unable to refinance or sell the project during a market downturn, this leads to an extended investment period for investors, and perhaps a loss of invested capital. Cyclical asset classes are not ideal for EB-5 investors.

Job Creation Risk

Reliance on Jobs from Operations: Industrial warehouse EB-5 projects typically rely heavily on job creation from operations. Operational job creation is much less reliable than jobs from construction activity. For example, if jobs are created from construction, the developer will only need to spend the budgeted amount on construction activity and the EB-5 jobs are created. However, when EB-5 job creation is reliant on operations, the proforma revenue needs to be achieved in order for the estimated jobs to be created.

In market downturns, the project will not achieve its projected revenue and will not create the jobs that it anticipated from the beginning.

Conclusion: Rethinking Industrial Warehouse Investments

While industrial warehouse investments have historically been viewed as stable and profitable, the current landscape presents challenges related to oversupply, increased borrowing costs, and a lack of diversified tenants. Investors should carefully assess market conditions and evaluate the long-term sustainability of their investment choices. The real estate sector is dynamic, and staying informed and adaptable is key to making informed investment decisions that align with your financial objectives. Reevaluating your investment strategy in light of these challenges is a prudent step toward long-term success in the real estate market.

Learn More About Low-Risk Real Estate Investments

To learn more about the EB-5 immigration process and the types of real estate investments are ideal for EB-5 investments, schedule a free consultation with EB5AN.