Thinking outside the box: An intro to the IOS market

Outdoor storage birds' view
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Ziad Mabsout
August 15, 2023
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Industrial outdoor storage (“IOS”) has gained significant traction as a sought-after property segment and has transitioned from a specialized market primarily dominated by small private investors and independent operators to an established commercial real estate asset class.

The demand for this sector surged during the pandemic due to the requirement for additional space to accommodate container storage and alleviate congestion at ports. According to experts interviewed by WMRE Common Area, the U.S. IOS market, a specialized subset within the broader industrial asset category, was estimated to hold a value ranging from $130billion to $200 billion as of August 2022.

What characterizes the IOS market?

IOS refers to industrial land sites that are zoned for outdoor storage purposes. These sites are typically located in close proximity to ports or inland hubs and serve as a designated space used by industrial tenants for the storage of vehicles, construction equipment, building materials, or containers, in an open-air setting. IOS properties are characterized by:

  • Lower floor area ratio (“FAR”) than warehouses or manufacturing properties, typically not exceeding 20%.
  • Ample storage capabilities through excess yard space, which is often surfaced with concrete or crushed rock.
  • Higher rents per square foot of building area due to the added value provided by the larger outdoor storage component.

IOS Property Types

Source: Industrial Outdoor Ventures

Navigating a Fragmented Market

The US IOS market has experienced increasing demand due to the growing need for e-commerce and last-mile delivery services, alongwith major disruptions in the supply chain. This surge in demand, combined with limited supply, regional ownership, and significant investments, has led to a strengthening of the supply-demand dynamics within the sector since 2018. As a result, the IOS market has witnessed lower vacancy rates and higher rent growth, further solidifying its position as a lucrative market segment.

  • Limited supply: The development of new IOS facilities is constrained due to challenges in obtaining proper zoning and permits in many areas.
  • Low vacancy rates: The IOS sector experiences lower vacancy rates compared to the broader industrial market, with an average rate ranging from 2.0% to 3.5%, compared to 5.0% to 6.0% for the overall industrial market.
Source: Marcus & Millichap - Industrial Outdoor Storage - October 2022

  • Rents growth: Rent is only a small portion of an industrial tenant’s total cost; tenants are willing to accept rent increases if it saves on transportation costs.
Source: Catalyst Investment Partners
  • Predictable     expenses: Landlords in the IOS market typically face maintenance costs as the main significant expense, while the cost of re-tenanting is comparatively lower than other asset classes.
  • Lease structures: Lease structures are comparable to traditional industrial triple-net leases that often have five, seven-, or ten-years term with annual rent escalators. However, many of the non-institutionally owned sites can have shorter lease terms and/or lower escalators.
  • Local and regional tenants: Most tenants in the IOS sector are local and regional companies with smaller credit profiles. However, there are a number of tenants that operate hundreds of locations nationwide and report incredibly strong financials.
Source: Marcus & Millichap - Industrial Outdoor Storage - October 2022

Notes: *As of 2Q; ** Based on direct, triple-net leases, all values from 2Q of each year; IOS Vacancy and rents representative of enclosed space on IOS properties

Competitive Landscape

The IOS market, similar to single-family rentals and self-storage, is currently undergoing the process of becoming fully institutionalized. However, its increasing significance in last-mile distribution makes it an important topic of discussion and consideration for investors.

Prominent players in the finance industry, including Industrial Outdoor Ventures, J.P. Morgan, Zenith IOS, Alterra Property Group, Criterion Group, Catalyst Investment Partners, Icon Equities, Leste Real Estate U.S., and Columbia Pacific Advisors, have made substantial investments in this expanding sector.

  • Industrial Outdoor Ventures concluded approximately 30 transactions valued at nearly $300 million in 2022. With a presence in 18 markets and close to 80 assets, including recent entries into Maryland and New Jersey, their total assets under management currently stand at around $800 million.
  • Zenith IOS established a $700 million joint venture with J.P. Morgan Global Alternatives in February 2022. Their objective is to develop a national IOS portfolio worth $1 billion.
  • Alterra IOS has a portfolio valued at nearly $2.5 billion which comprises over 185 properties spanning more than 30 states.
  • Green Point Partners launched in March 2023 a dedicated $500 million truck and trailer IOS platform through a strategic investment in Semi-Stow, an Austin-based semi-truck parking and trailer storage operator.
  • Criterion Group and Columbia Pacific Advisors formed a joint venture with plans to deploy more than $2 billion in capital in IOS properties across the United States by late 2023.

Iconic Equities and Leste Real Estate U.S. established a programmatic joint venture supported by approximately $150 million in institutional capital. This venture aims to acquire $400 million worth of industrial outdoor storage facilities across the United States.

Investing in IOS Properties

As the IOS market continues to gain traction and recognition, it presents an intriguing investment opportunity for those seeking a balance of anticipated growth and stability of income. With its distinctive characteristics, including lower FAR, higher rents, and limited supply, IOS properties offer a defensive position in the market while providing the potential for significant appreciation. However, tapping into the vast potential of the IOS market requires specialized knowledge and expertise. Given its niche nature and fragmented market, comprehensive understanding and careful analysis of investment opportunities are vital.