How to Unlock the Equity in your Existing Industrial Building
We often stress the importance of looking at your industrial space as an integral component of your business rather than just a place to put your industrial business. Facilities cost is one of the biggest of your fixed expenses, so it only makes sense to make sure each of those dollars is spent in a way that optimizes overall efficiency. But, balancing the short term changes to your operation with a years’ long lease or owned industrial facility is problematic. Most industrial real estate leases run 5 years or more, and owner/users tend to hold their properties for even longer.
One of the first questions we ask clients when we sit down with them is: how has your business changed since you moved into your space? We rarely get an answer of “not at all”. Actually, many warehouse business owners we talk to report that numerous changes have affected how well their current facility functions. Some are still growing while others are suffering from stagnating revenues and industry challenges. And there are others who need a different building configuration related to power, loading, beam clearance, office layout or location to promote viability and growth.
Back in 2023, we wrote a post on Getting Unstuck that was all about working around existing lease obligations to optimize industrial space efficiency. This approach remains relevant, making relocation a proactive strategy for adapting to current business and economic challenges. In this post we look at the owner/user sector, as challenges there are different than for those business owners who lease their industrial facilities.
Currently, sales prices remain relatively flat, mainly due to low availability of high-quality properties and a decline in demand from potential owner/users. Economic uncertainty and high mortgage rates continue to keep potential owner/users on the sidelines, as the cost of a new mortgage is substantially higher than a monthly lease payment for the same building.
However, existing owner/users are in a good position to put themselves in the optimum facility due to the massive equity they have accumulated during the longest bull real estate run-up in history that topped out in the last half of 2022. By using the 1031 exchange mechanism, they are in position to trade into an alternate industrial facility, fully tax deferred. Since they have a mountain of cash to acquire their up-leg properties, they are less dependent on more expensive mortgages to get themselves into the right building. And, key provisions of the recently enacted One Big Beautiful Bill Act of 2025 (OBBBA) add even more incentive to make new capital investment. The OBBBA brought back 100% bonus depreciation, which can be combined with Cost Segregation Depreciation for massive up-front tax benefits. Click here for our posts on that potent combination: One Beautiful Bill & Cost Segregation.
Consider the following hypothetical rightsizing example: The long-term owner of an 18,000-square-foot industrial building no longer needs as much space due to new technologies, including more efficient machinery to produce the parts he fabricates for the medical equipment industry. He locates a 10,000-square-foot warehouse building that is more efficient in terms of its increased power capacity to run his new machines, along with a reduced office footprint that reflects his recent move to automate many of his administrative functions with advanced AI-based software. He believes the move will allow him to increase production by developing new accounts without reducing the level of service he offers his existing clients.
To make sure that he completes a fully tax-deferred 1031 exchange, he invests the remaining cash from the sale of his existing building to acquire a single-tenant, net-leased investment property that will produce net income and further diversify his portfolio in preparation for future retirement. He then uses cost segregation in combination with bonus depreciation via the OBBBA on both new properties and he saves hundreds of thousands of dollars in taxes in the year the exchange takes place. If he doesn’t have enough income to get the full tax benefit in year 1, then the net operating loss created by the accelerated depreciaition carries over to subsequent tax years.
So, in this instance, our hypothetical industrial business owner gets out of a building that no longer serves his needs, increases the efficiency of his business and acquires an income producing commercial property all at once. Put another way, he optimizes the use of the equity locked up in a building that no longer serves his needs and redeploys it into two properties that generate both business and investment income, not to mention the massive tax savings that goes with it.
We think we are going to see a lot more of this in the years to come, as potential new entrants into the owner/user ranks will remain frustrated by the fact that they just can’t afford to pay a premium price and service expensive debt at the same time. Exchanges involving existing owner/users either eliminate the need for debt or reduce it substantially, as most of them are sitting on piles of equity. And they can pay each other higher prices because that is all rolled up inside the 1031 exchange envelope.
So, if you are an owner/user of an industrial building who would like to right-size your operation, give us a call to discuss this interesting alternative for those like you who were smart enough and brave enough to buy your own industrial building. You deserve a big win of your own.