THE RISE OF INDUSTRIAL OUTDOOR STORAGE (IOS)

Industrial Outdoor Storage (IOS) has transformed from a niche segment within the industrial commercial real estate market to a highly sought-after asset class for private and institutional CRE firms. The IOS market is currently valued at around $200 billion.

What is IOS and what drives its demand?

IOS properties are characterized by low building coverage and a surplus of yard space or predominantly parking areas with small structures. Tenants from various industries occupy these properties, utilizing them for storage, maintenance, and dispatching of industrial vehicles. Typical uses for IOS sites include truck terminals, e-commerce distribution centers, trailer storage, container storage, and construction or heavy equipment yards. These sites play a vital role in product transportation across the United States.

Three key factors contribute to the growing demand for IOS assets. Firstly, the COVID-induced boom in e-commerce has necessitated more logistics and transportation facilities. Secondly, industrial properties with extra parking or outdoor storage space in urban areas are scarce. For instance, in the greater Los Angeles area, only 2% of the 1.5 billion square feet of industrial commercial property was IOS in 2020. Thirdly, the value of IOS assets stems from open space, not Class-A amenities, leading to low capital expenditures on such properties.

Key features investors seek in these properties include low coverage, functional space, and location. IOS assets' lease values are based on the total yard space rather than the site's buildings. Prime locations offer immediate access to major freeways and proximity to transportation hubs such as deep-water ports, airports, and train depots.

While recent bank collapses, financial market instability, and economic volatility have caused many commercial real estate investors to pause, and import/export tensions and global political uncertainties have slowed or halted imports, there are still intriguing investment opportunities in IOS assets for two main reasons.

Increasingly Low Inventory

IOS assets have rapidly become a competitive asset class for top-tier institutional investment firms, fueling demand and further reducing already low inventory. The scarcity of IOS assets in urban areas where they are most needed is exacerbated by two factors: 1) available land in desirable urban cores is typically developed rather than used for outdoor storage, and 2) IOS properties can impose unique burdens on their surroundings, such as increased traffic and unsightly storage, leading to stricter local government regulations. As regulations tighten, converting other property types to IOS becomes more challenging, further increasing demand for existing assets.

Limited Industrial Land Attracts Long-Term Tenants

Industrial tenants seeking spaces with parking or storage and outbuildings for lease often struggle to find suitable properties due to limited land availability. Once they find a suitable location, they are more likely to sign extended lease agreements, which benefits both property owners and tenants by ensuring stable cash flow and business stability.

Conclusion

Despite ongoing adjustments within the industrial real estate industry, the potential for identifying and acquiring IOS properties remains appealing in both short and long-term perspectives. The niche IOS market, characterized by limited availability and a high number of long-term tenants, should continue to be viewed as an attractive investment opportunity.