The industrial outdoor storage (IOS) niche – alongside related sub-categories such as self-storage, cold storage and data centers – has continued to draw new debt capital amid sustained bouts of market volatility and concerns around looming recessionary signals.
Lending on such assets requires operational expertise, granular geographical analysis and local relationships akin to the requirements for making investments in more traditional industrial assets. Here are five things to know about the IOS sector and how it is primed to evolve in the coming quarters.
1 An open field
The IOS niche has significant tailwinds at a time when debt providers are looking for less saturated asset classes compared to the broader field of warehouses, distribution centers and manufacturing centers.
The sub-category has seen exceptional rent growth as a result of long-term secular demand supporting the industrial sector broadly and is similarly benefitting from a lack of supply compared to the bulk warehouse space.
Data from Calabasas, California-based advisory Marcus & Millichap shows vacancy in IOS dropped below 3 percent in 2022. Since 2019’s end, rents have jumped 30 percent compared to the broader industrial sector, which has seen a 24 percent bump in rents.
Charlie Rose, managing director and portfolio manager for Invesco Real Estate, says the Dallas-based firm is projecting high single-digit net operating income growth in industrial over the next two years as supply is peaking.
“Beyond that, we’re expecting supply to tail off pretty significantly as a result of the combination of rising construction costs and elevated interest rates,” Rose says. “But IOS specifically, we think will continue to benefit in an outsized way as compared to industrial during that time.”
PODCAST: How lending to the industrial outdoor storage sector is evolving
Listen to Invesco’s Charlie Rose talks about why the niche is drawing more attention in the current market.
2 Traditional industrial tie-in
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.
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 the value from a location perspective but they are also getting proximity to their customers.”
Rose says Invesco specifically targets West Coast and East Coast port markets 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,” he notes.
3 Outdoor in vogue
Laub, whose firm had its IOS investing further catalyzed by a $700 million JPMorgan Chase joint venture in February 2022, says the sub-sector has the potential to grow into a $200-billion-dollar category.
Laub notes that although 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. “It’s a big category, it’s a big market, it’s a big country, so there’s plenty of room for everyone in the sandbox,” he says. “But certainly competition has risen.”
Rose says that in the last two years, Invesco has started to witness an overlap of strong sponsorship and attractive fundamentals in the IOS niche. “Historically, IOS has not been an institutionally investable asset class,” Rose says. “So while we liked the fundamentals in the space, the sponsorship profile that we typically target – the very established, deep-pocketed institutional investors – were not active in the space.”
4 Ability to adapt
Laub says that while he does not think IOS is immune to a widespread economic downturn should one occur, 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 our sites are eventually going to be development sites. Some of them will be, some of them are today, but we always like to have in the back of our minds that in the event the opportunity changes, the area changes, and perhaps IOS no longer becomes the highest and best use that there’s an option to maybe build industrial buildings, to do upzoning to,” Laub says. “Optionality is very important.”
He notes zoning is nuanced and can be opaque for IOS opportunities, contributing to the challenge of entering and expanding in the space. Depending on the municipality, zoning code may not call out IOS assets as a specific standalone use, which then requires more refined interpretation to navigate investment opportunities.
5 Picking the right asset
Lending toward IOS assets in the present market looks notably different from a year ago, when the niche was garnering media attention in what was a low interest rate environment.
Laub explains that because of the rise in rates, competition is likely to continue thinning alongside the wider commercial real estate debt market, which leaves the door open for experienced and well-capitalized firms looking to grow an IOS pipeline.
Rose says Invesco is 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.
“Our expectation would be that you would continue to see effectively no new supply added in the IOS space and accordingly, we actually would anticipate that there could be some outsized rent growth in the space relative to the overall industrial sector,” he adds.