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Industrial properties among the smallest sectors of the commercial real estate market, such as logistics and light industrial properties, have proven their ability to create value, even in challenging market environments. In turn, this has strengthened the sector’s position in the eyes of investors. For example, in 2022, industrial properties accounted for 16% of the total volume, while in 2019, the corresponding figure was only 7%, according to KTI Finland. Foreign investors especially have increased their investments in recent years.
Rental levels and market values of industrial properties rose significantly in the early 2020s. Moreover, according to the Rakli-KTI Commercial Property Barometer published in October, the balance figures for the expectations of rental trends for industrial spaces in major cities are clearly on the positive side across the board. The most positive rental expectations were in the Helsinki Metropolitan Area. In addition, long-term index-linked leases have provided stable cash flow, keeping investors happy. Occupancy rates are also expected to develop positively. The long-term outlook for the sector remains attractive.
Industrial premises exist to serve companies engaged in production. In addition, their design should also consider aspects such as logistics so that operations like freight transport are as efficient as possible.
Although industrial facilities are designed so that their use can be changed to accommodate changes in activities, they are typically built in a user-oriented way to serve individual production processes. For investors, the risk arises when there is a change in the tenant, which can create challenges in finding a similar occupant, and modifying the premises generates costs.
However, in the light of the statistics, these risks in the sector have borne fruit in recent years. The total return on industrial properties was the highest for the second year in a row in 2022 compared to other sectors. Although the total return on industrial real estate was several percentage points lower than from logistics last year, the total return on industrial real estate (6.7%) was significantly better than the market average (0.6%) last year.
In the industrial real estate sector, there has also been significant demand for investment in high-quality light industrial properties in recent years. Investors are attracted to this sector by higher income returns than in most other real estate sectors.
As the population grows and urbanisation progresses, the need for goods and services in urban areas increases. As the population of major cities grows, so does the need for more production and repair shops, for example.
Although manufacturing has evolved through increased automation and technological advances, it still requires industrial spaces. Manufacturing companies are indeed looking for modern and efficient facilities in which to produce their goods that meet current requirements for industrial buildings.
User needs are very diverse and can include specific features such as the height of the premises. These are what drive investor and user demand. The key feature for smaller industrial spaces is to be located near subcontractors, business services and employees. This is why smaller industrial spaces are typically located close to office areas. On the other hand, larger industrial facilities are typically located near their raw materials, markets or in a good location for logistics. In addition, spaces are typically required to be functional and adaptable. For users, choosing the production location is a significant strategic decision.
Every city also has designated areas for industrial properties. There are few undeveloped industrial plots in the Helsinki Metropolitan Area, and most of the construction projects in the Helsinki region are outside the metropolitan area. Zoning in the metropolitan area continues to limit industrial spaces, and the region’s vacancy rate has remained low, reflecting a limited supply – especially of modern and large spaces – contributing to upward pressure on rents.
In addition, ESG has emerged as one of the essential factors in the choice of facilities for users. Investors and tenants are increasingly prioritising eco-friendly features when it comes to their facilities. Environmental efforts are also in line with the objectives of corporate social responsibility.
In recent years, industrial properties have significantly increased in popularity in the real estate investment market. For investors, industrial real estate has provided predictable cash flow over an extended period. In addition, financially stable tenants have offered investors a hedge against inflation. Rental expectations for industrial real estate are still significantly more positive than for office and retail spaces.
Transaction volumes have decreased significantly, which is in line with the rest of the market. Although transactions have also slowed down in this sector, the relative share of industrial real estate transactions has increased. In January–September 2023, the volume of transactions in industrial real estate accounted for 19% of the total volume. The last time this figure was as substantial was in 2014.
So far, there has been strong demand for and interest in industrial spaces, and there has even been interest in large facilities.
Helsinki Region Trends provides up-to-date information about trends in the region’s commercial real estate market, according to which the vacancy rate of industrial and warehouse space seems to have settled close to 3% in the Helsinki Metropolitan Area. The vacancy rate of industrial and warehouse facilities decreased at the beginning of 2020 and was 3.2% in the first half of 2023. Due to these low vacancy rates, landlords have been able to index rents in full.
Amidst uncertainty, companies are focusing on streamlining their operations, while the supply of modern industrial facilities in the Helsinki Metropolitan Area is very limited. There are virtually no vacancies in the best locations and properties.
Indeed, industrial real estate was the only real estate sector in which capital growth continued to rise in 2022. Industrial property values have risen alongside rental income over the years, resulting in a stable return on investment.
Industrial tenants tend to have a lower turnover, as relocating operations is not easy. This reduces the hassle and costs associated with tenant turnover. Industrial properties typically offer stable and predictable rental income. Long-term leases with tenants often result in stable cash flow for investors. Industrial properties can therefore provide stability and the benefits of diversification to your investment portfolio.
With Retta’s support, you will ensure predictable returns and capital growth of your real estate investments for years to come. Planned real estate management strongly supports the development of the value of your real estate investment and the predictability of returns. When the different aspects of property management are handled professionally, the appeal of the property increases and existing tenants are happier. Attractive space is also easy to market to new tenants.
This article was written by Anton Takkavuori, Retta’s real estate analyst
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