The industrial outside storage (IOS) sector has evolved significantly over the past 10-15 years, but many people still aren’t familiar with these unique locations. A panel of IOS investors shared their insights on the future of the sector at I.CON East, from investment cycles to acquisitions/disposals and when it will be considered an institutionalized product class.
Moderated by Justin Horowitz, debt and equity broker at Cooper Horowitz LLC, panelists included CBRE Vice Chairman Ryan Bain, JPMorgan Asset Management Vice President Ryan Kavanaugh and Jadean Capital Managing Director Dan Szczynski.
Key takeaways from their conversation include:
There is plenty of room to grow. 18 months ago the industry was on the brink of a major exodus from the IOS space, but market volatility halted the exodus. This is a mature market and is well on its way to becoming an institutional asset class. And true institutionalism will not happen until quality products are in the hands of institutions.
What will generate the cash flows? The equity side needs education to generate the best adjusted returns. Lenders, especially life insurance companies and pension funds, are getting much smarter. There is a lot of interest and activity as capital is looking to get into this space. Debt followed equity and rose in 2021-2022 but is now leveling off. Investors are aware of the relative value and once they know it is there, it is hard to overlook.
Where will IOS have the greatest future opportunities? Location and zoning are key. There are many needs for IOS, such as truck trailer parks, construction equipment, and shipping containers, and interchangeable locations are favored. While it is impossible to predict with certainty, site selection in an area where zoning and codes are not likely to change is ideal.
What are the threats and barriers to entry for IOS? As with many types of real estate, risks arise from NIMBYism and local governments that may change zoning requirements. Environmental regulations at the local and federal levels can be a challenge, especially as they relate to substances known as PFAS. PFAS are a large group of toxic and hazardous substances, also known as “forever chemicals,” that are widely used in industrial processes and consumer products.
How constrained is supply? Very constrained in areas around ports and major transit networks, but less so in suburban markets. Prime locations are frequently redeveloped into mixed-use or residential, and IOS space that doesn't generate tax revenue or jobs is moving away from desirable locations. This means that very good locations in very good markets are very limited, and municipalities aren't going to add any more.
Developing a site is as difficult as advertised. Before purchasing an IOS site, make sure you understand exactly what you are buying and who you are targeting as tenants. Know what can be stored on the land, understand height restrictions, and realize that the usable acres of a site are not the same as the total acres of a site. Avoid conditional approvals.
Consider how rental rates are calculated. Will you rate by the acre, by the month, or by the square foot? Truck terminals are calculated by the door and will likely continue to be calculated that way. Per-acre rental rates are the most commonly used measure, but vary widely depending on what is stored on-site. The footprint of a shipping container remains the same even if it is stacked three high. It is important to break down the value of your tenant's revenue stream.
Keep the future in mind. What will the land look like in 10 years? If the zoning changes, how could the land be reconfigured for a different use? This forward-looking planning gives you an advantage with lenders who value flexibility.
This post is brought to you by JLL, the social media and conference blog sponsor for NAIOP's I.CON East 2024. For more information about JLL, visit www.us.jll.com or www.jll.ca