The new $200 billion outdoor storage market - hidden around every corner

Industrial outdoor storage (IOS) is a new property type in the commercial real estate market that has become increasingly popular among opportunistic investors. It is characterized by its simplicity and physical constraints, making it easy to manage and urgently acquire due to unfriendly zoning laws. While there is no official definition of IOS, it includes various types of properties such as truck yards, maintenance shops, storage lots, equipment rental, and empty lots near ports.

Market Overview

The market value of IOS in the U.S. is estimated to be around $200 billion. The lack of an official definition of IOS has made it difficult to estimate the size of the market accurately. Nevertheless, it is widely regarded by investors as an appreciating asset intimately tied to logistics and industrial sites, with limited room for expansion. As a result, it is becoming increasingly attractive to investors seeking inflation hedges.

IOS spaces are typically located next to ports, rail, airports, or intermodal transport spots, offering diverse and valuable real estate opportunities. The properties have lower coverage, meaning less than 20% of the space is covered with a building, like a garage or storage space. These spaces are undervalued, and tenants don't have many alternative options or places to go, making them attractive to investors.

Marcus & Millichap reported that IOS vacancy fell below 3% in 2022, and rents have spiked 30% since the end of 2019, compared to 24% for industrial rents. IOS has become one of the most favored investment opportunities in the market, with investors placing high value on defensive positions.

Factors Driving the IOS Market

The rising cost of traditional industrial buildings has made IOS an attractive alternative to investors. While there is no official name for the property type, it can be called industrial outdoor storage, industrial storage facilities, or an industrial prop parking facility. Investors are attracted to IOS due to its simplicity and physical constraints, making it easy to manage and urgent to acquire.

Due to unfriendly zoning laws, few cities and municipalities want to zone for and encourage additional truck yards. Therefore, IOS properties are widely understood by investors to be an appreciating asset intimately tied to logistics and industrial sites. Investors are looking for defensive positions, and the physical constraints of IOS make it an attractive investment opportunity.

The pandemic has also highlighted the value of these spaces. During the pandemic, there was an intensified drive to store trailer trucks, containers, and equipment beyond the traditional uses by shipping and construction. The need to store and supply during an intense build-up of industrial demand, as well as a push to acquire and build more last-mile delivery spaces and consolidate logistics operations as fuel prices rose, created a condition for white-hot rent growth in IOS.

Expertise in the space is often hard to come by, making IOS a regionalized and fragmented submarket. Many brokers and buyers come from retail and self-storage, which may be oversaturated, looking for the next big thing.

IOS Investors

Several funds have focused on IOS specifically, partnering with large investment banks as a JV partner. Big names in the space include J.P. Morgan Global Alternatives and Zenith IOS, Alterra Property Group, and Criterion Group and Columbia Pacific Advisors, whose joint venture plans to deploy $2B by the end of the year.

Industrial Outdoor Ventures CEO Tom Barbera, who started as an industrial broker in 1993 and formed his current venture in 2016, said the fundamentals of the space have always been strong. Despite many of the tenants being national, publicly traded companies with great balance sheets, it has traditionally been overlooked because it’s not what Barbera calls a “brochure-quality industrial real estate.”

In 2021, Industrial Outdoor Ventures sold a $200M portfolio to Stockbridge. Since then, the Chicago-based firm has acquired a 78-asset portfolio worth $1B and plans to expand into the Southeast in the next year or so. With the average deal size between $5M and $15M for a property, many larger investors may lack specific IOS strategies and rely on others to assemble portfolios for them to acquire, typically by buying out existing mom-and-pop owners.

​Future Prospects

IOS has a bright future, and investors can expect appreciation in the value of their assets. IOS spaces are undervalued and tenants do not have many alternative options or places to go, making them an attractive investment opportunity. Even if demand for traditional industrial significantly cools after the skyrocketing market of the last 12 to 24 months, the already increased supply of warehouses and shipping routes might actually make IOS even more sought-after as a means of handling increased logistics traffic. Worst-case scenario, investors can redevelop this space into more traditional industrial uses and find another high-performing valuable use, which in turn further restricts the supply of IOS.

Conclusion

Industrial outdoor storage (IOS) is a new property type in the commercial real estate market that has become increasingly popular among opportunistic investors. The market value of IOS in the U.S. is estimated to be around $200 billion. The lack of an official definition of IOS has made it difficult to estimate the size of the market accurately. However, it is widely regarded by investors as an appreciating asset intimately tied to logistics and industrial sites, with limited room for expansion.

IOS spaces are undervalued and tenants do not have many alternative options or places to go, making them an attractive investment opportunity. Due to unfriendly zoning laws, few cities and municipalities want to zone for and encourage additional truck yards, making it an attractive investment opportunity for investors looking for defensive positions. IOS has a bright future, and investors can expect appreciation in the value of their assets.