Industrial Outdoor Storage Assets Are in Scarce Supply

By Lukas Huberman

Industrial Outdoor Storage (IOS), once just a niche within the broader industrial commercial real estate segment, has become a sought-after asset for both private and institutional CRE companies. The market for IOS is now estimated at $200 billion.

What’s IOS and why is it in demand?

IOS assets are properties with low building coverage. They contain excess yard space or include primarily parking areas with small buildings. IOS properties are occupied by a wide variety of tenants across numerous industries that support the broader supply chain through storage, maintenance, and dispatching of delivery or other industrial vehicles. They are typically used as truck terminals, e-commerce distribution points, trailer storage, container storage, and even construction or heavy equipment yards. IOS sites are critical for transporting products throughout the United States.

The desire for these assets has been stoked by three central factors. One is COVID-driven increases in the e-commerce business and the required logistics and transportation facilities those business models require. Two, industrial assets with extra space for parking or outdoor storage in large urban areas are in extremely short supply. In the greater Los Angeles area, as of 2020, out of 1.5 billion square feet of industrial commercial property only 2%, or 30.5 million square feet, was IOS. And three, because the value of IOS assets is driven by open space as opposed to Class-A amenities, capital expenditures on such properties are very low.

As an investment firm that owns and manages over four million square feet of industrial property in Southern California, we are intimately familiar with the strong industrial sub-market and understand the value of IOS assets. When identifying these types of properties, a few key features we look for include low coverage, functional space, and location. While the property’s structures can be utilized by the tenant, an IOS asset’s lease value is based on the total yard space, rather than the site’s buildings. Prime locations include ready or immediate access to major freeways and short distances to transportation hubs such as deep-water ports, airports, and train depots.

Recent bank collapses, financial market jitters, and economic volatility have triggered a pause for many commercial real estate investors, while import/export power struggles and global political uncertainties have contributed to a slow down and potential halt on imports. As all these factors may cause the dynamic of logistics and transportation facilities to begin changing, we believe there will continue to be interesting, though limited, opportunities for investment in IOS assets due to the following two reasons.

Increasingly Low Inventory

Despite economic concerns, IOS assets have recently flourished to become a competitive asset type for institutional investment companies at the highest national level, driving demand and further tightening low inventory. In addition to increased competition, availability of IOS type assets in the urban areas where they are particularly needed is increasingly scarce for two primary reasons.

First, when there is land available in the highly desirable urban cores, the typical outcome proceeds to building rather than utilizing for outdoor storage. Second, IOS properties can levy unique burdens on their surrounding location including increased distribution or transportation traffic and unappealing storage, causing cities and local government to grow more stringent in their regulations. As regulations increase, it will only become more difficult to convert other property types into IOS, heaving the demand for existing assets.

Limited Industrial Land Leads to Long-Term Tenants

Industrial tenants looking for spaces that include parking or storage, as well as outbuildings to lease, can have difficulty finding the right property due to the limited land available. When a location suitable for their company’s needs is identified, they are more likely to want extended lease periods. Securing a long-term lease is beneficial to both the property owner and tenant, establishing solid cash flow for the property and business certainty for the occupant.

Conclusion

Though the industrial real estate industry continues to adjust to market conditions, the opportunity to identify and acquire industrial outdoor storage (IOS) properties remains tantalizing in both its short-term and long-term prospects. With its limited availability and preponderance of long-term tenants, the niche IOS market should continue to be considered an attractive space for investors.

Lukas Huberman is VP and director at acquisitions at BLT Enterprises, headquartered in Santa Monica.