INDUSTRIAL OUTDOOR STORAGE CONTINUES TO ATTRACT DEBT CAPITAL

Despite a possible recession in late 2023, the industrial outdoor storage (IOS) niche has continued to draw interest from lenders.

IOS lenders should focus on borrowers with operational expertise, excellent market analysis and deep local relationships. Here are four themes to follow as you evaluate debt and equity opportunities in the IOS sector, finishing with a forecast of the near future.

IOS Ties to Traditional Industry

IOS assets, which can include container or trailer yards, bulk material yards and fleet storage centers, tend to have a degree of overlap in terms of favorable geographies relative to more standard industrial offerings.

On a recent podcast, Daniel Laub, chief operating officer and co-founder at Zenith IOS, says the New York-based sector specialist focuses on super infill industrial pockets within major markets when sourcing IOS opportunities. “A site that is at the intersection of two freeways is not a site for us,” he says. “We want to be close to the customer, we want our tenants to feel like they are getting value from a location perspective but they are also getting proximity to their customers.”

Many investors favor port markets on the coasts and a number of the higher growth Sunbelt markets for IOS opportunities. “When we’re looking at those Sunbelt markets, we’re really focusing on the most infill sites where there are barriers to entry and unique demand drivers as a result of tenants who have effectively last-mile needs to service local populations,” said Charlie Rose of Invesco.

Greenfield Opportunity in IOS

Existing loan books are overstuffed with multifamily, industrial, and (gasp!) office assets. Contrasting the standard “four food groups” of commercial real estate, the IOS sector niche has significant tailwinds at a time the debt providers are looking for less saturated asset classes.

While warehouses, flex space, lab and R&D, and even manufacturing spaces have been over-built in recent years, IOS is still losing net supply. The sub-category has seen exceptional rent growth as a result of long-term secular demand.

Marcus & Millichap reports that IOS vacancy in 2022 dropped below 3%. Since 2019’s end, rents have jumped 30% compared to the broader industrial sector, which has seen a 24% bump in rents.

Invesco and Green Street both project high single-digit net operating income growth in industrial over the next two years as supply is peaking.

Outdoor is Institutionalizing

While deal pace has slowed in the last six months, there was a moment in the second and third quarters of 2022 where it felt like a new entrant was diving into the space every week. In the last two years, industry participants witnessed an overlap of strong sponsorship and attractive fundamentals in the IOS niche.

Historically, IOS has not been an institutionally investable asset class given the fragmented ownership and tenants of lower credit quality. Acceptance of a portfolio approach to risk management, when combined with deep market knowledge and careful tenant selection has investors rushing into the space.

Zoning Upside of IOS

IOS is not immune to a widespread economic downturn, but it may be relatively insulated compared with other asset classes so long as a portfolio is diversified across geographies and tenant types such as construction companies, trucking and logistics businesses or local municipalities.

Land usage by IOS assets also has the benefit of being reworked, especially when an option to upzone into a traditional industrial offering is available. Not all IOS sites will become future re-development opportunities, but the potential exists and could offer exit optionality as neighborhood grow and change.

Zoning for IOS can be opaque, as the zoning code may not call out IOS assets as a specific standalone use. Many situations will require a more refined interpretation (with confirmation from the local planning and zoning board) to navigate investment opportunities. One particular hurdle is the allowable height for stacking containers. If you are considering IOS properties near ports, please check for height restrictions!

Want to confirm local zoning with our AI-enabled zoning bot? CLICK HERE

Outlook for IOS

Investors are anticipating strong fundamental demand for IOS in 2023 because of increased ecommerce activity, onshoring, reshoring, the Build America movement, the need for more immediate last-mile delivery services and inventory build-up.

No new supply is expected to be added to the IOS space and accordingly, we anticipate that there could be some outsized rent growth in the space relative to the overall industrial sector.

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