How to Unlock the Equity in Your Existing Industrial Building
We often stress that your industrial real estate is not just a place to operate, but a critical component of your business strategy. Facility costs are among the largest fixed expenses most companies face, so every dollar spent on space must support efficiency, growth, and profitability.
The challenge is that business needs evolve far faster than real estate commitments. Industrial leases typically run five years or longer, and owner-users often hold their buildings for decades. That mismatch can quietly erode efficiency over time.
How Business Needs Change — and Buildings Don’t
One of the first questions we ask clients is: How has your business changed since you moved into your current space?
Rarely is the answer “not at all.”
Many industrial and warehouse users experience:
- Growth or contraction in operations
- New production technologies
- Different power, loading, or clearance requirements
- Reduced office needs due to automation and AI tools
These challenges are similar to those we discussed in our article on optimizing industrial space efficiency when businesses get stuck.
Why Owner-User Challenges Are Different
For tenants, relocation can be a strategic response to change. For owner-users, the decision is more complex.
Sales prices for industrial buildings remain relatively firm due to:
- Limited availability of high-quality properties
- Reduced demand from new owner-users
- Elevated mortgage rates
As a result, monthly ownership costs are often higher than comparable lease payments, keeping many potential buyers on the sidelines. This dynamic has been explored in our discussion of leasing versus buying industrial real estate.
Why Existing Owner-Users Are in a Strong Position
While new buyers struggle, existing owner-users are uniquely positioned.
Most long-term owners accumulated substantial equity during the historic industrial real estate run-up that peaked in late 2022. That equity creates optionality — especially when paired with a 1031 exchange, which allows owners to reposition assets fully tax deferred.
Because they bring significant cash into the transaction, owner-users are less dependent on high-cost debt when acquiring replacement properties. This approach aligns closely with strategies we’ve outlined for converting industrial property equity into income and flexibility.
How Tax Policy Makes Right-Sizing Even More Attractive
Recent changes under the One Big Beautiful Bill Act (OBBBA) add another layer of incentive. The return of 100% bonus depreciation, when combined with cost segregation, can generate massive upfront tax savings on newly acquired properties.
We’ve covered this powerful combination in detail in our posts on bonus depreciation and cost segregation strategies. These benefits can materially improve cash flow in the year the exchange takes place.
A Practical Right-Sizing Example
Consider a long-term owner of an 18,000-square-foot industrial building whose space needs have changed. New machinery, automation, and AI-driven administrative systems allow him to operate more efficiently in a 10,000-square-foot warehouse with:
- Higher power capacity
- Improved layout
- Reduced office footprint
He sells the larger building and completes a 1031 exchange into:
- A smaller, more efficient owner-user facility
- A single-tenant net-leased investment property to generate income and diversify risk
By using cost segregation and bonus depreciation on both properties, he generates substantial tax savings. If those deductions exceed Year-1 income, the resulting net operating loss carries forward to future tax years.
The result:
- Improved operational efficiency
- Diversified income
- Reduced reliance on debt
- Significant tax advantages
Why We Expect More Owner-User Right-Sizing Ahead
We believe this strategy will become more common in the coming years. New owner-users remain constrained by high prices and borrowing costs, while existing owners can trade equity-rich properties with little or no new debt.
These trends are already shaping industrial real estate transaction strategies in Orange County. Right-sizing allows owner-users to unlock value from buildings that no longer fit and redeploy that equity into assets that better support today’s business realities.
Own an Industrial Building That No Longer Fits Your Business? Let’s Explore Your Options.
If you’re an owner-user sitting on significant equity and wondering whether right-sizing could improve efficiency, reduce risk, or unlock new opportunities, a strategic conversation can help clarify the path forward.
👉 Talk to a Zehner Hill industrial real estate advisor