Industrial’s Newest Darling: Outdoor Storage
Industrial outdoor storage properties, sometimes referred to as industrial service facilities, are one of the least glamourous commercial real estate properties, until now. Currently, they’re proving to be one of most lucrative and in-demand as of late. Investors of all kinds are taking note. Even institutional investors are beginning to pour capital into the asset class.
What is industrial outdoor storage?
Industrial outdoor storage, or IOS, refers to properties that mostly provide uncovered ground to keep items often needed by industrial users with other businesses nearby, from truck trailers to construction materials.
This subset of property is distinguished from more traditional industrial assets in several ways.
First, IOS typically has a much lower floor area ratio (FAR) in comparison to warehouse or manufacturing properties. FAR values for industrial service facilities don’t usually exceed 20 percent, whereas most traditional warehouses generally have FAR values greater than 50 percent. The most common IOS sites range from 3 to 20 acres, with less than 25 percent of land being occupied by buildings (which usually includes just a small office for site management).
Another difference relates to property utilization.
Another difference relates to property utilization. Users of traditional industrial space are primarily interested in the property’s indoor storage capabilities, placing value on ceiling heights, column spacing, and distribution access through docks and drive-in doors. IOS users, on the other hand, find value not only in the building itself, but also in the storage capabilities of the ground the building sits on.
Typical IOS uses include equipment storage and maintenance, container yards, bulk material storage and distribution, fleet vehicle storage, as well as trailer parking and drop lots. Properties that can accommodate these unique storage requirements are incredibly attractive to tenants in the equipment rental, trucking, building material supply, shipping container, and oil and gas industries, among others.
A final differentiating characteristic is rent. IOS facilities command higher rents per square foot of building area in comparison to their more traditional industrial counterparts. The additional value that tenants derive from the larger outdoor storage component helps drive this increase, and we usually quote rent per square foot of land area as an additional metric when advising clients on transactions involving these properties.
What to Know about IOS Cap Rates in 2021 Cap rates for IOS facilities can vary widely given the nature of the tenant’s credit profile, the length of the lease term and the intrinsic real estate. While fragmented in terms of the number of tenants, there are a few national companies in the equipment rental sector, for example, that are often sought after by net lease investors, including United Rentals, HERC Rentals, Sunbelt Rentals and H&E Equipment Services. A well-located property leased to one of these tenants on a long-term lease of 10 years or more can easily trade with a cap rate in the low to mid-5.0 percent range.
For non-credit and private-credit tenants, cap rates are higher by as much as 50 to 75 basis points, all else being equal. For non-credit deals, the trading cap rate is largely dependent on other factors including lease terms, quality of the building, location, size of the outdoor storage component, and the ability to achieve replacement rents at or above the current rent level, among other characteristics.
Despite an overall slowdown of investment sales activity due to COVID-19, the pandemic has not had a detrimental impact on pricing trends for IOS facilities.
Despite an overall slowdown of investment sales activity due to COVID-19, the pandemic has not had a detrimental impact on pricing trends for IOS facilities. If anything, investor demand has increased for this unique asset class, and pricing has tightened as net lease investors have pulled away from non-essential retail assets and more capital flows into the industrial sector.
Institutional Investors Entering the Fray
The IOS property type is far from new, but until recently, it has been the exclusive province of either owner-occupiers or local and regional property owners.
Over the past few years, national players like Brookfield Properties and JPMorgan Asset Management have come around to IOS as an asset class that costs very little to maintain but has reliable cash flow and a favorable ratio of supply to demand. Unlike distribution centers, which have strong demand but also steady supply, there is little reason to believe that the pool of available IOS properties will grow significantly any time soon.
What’s more, any property that is well-located for IOS today may also be well suited for higher, better uses – from warehouses to multifamily development – in the future, making IOS properties especially attractive to investors with a long-term mindset.
Demand for IOS Properties Remains Sky-High
Given the large land components, and oftentimes infill nature of these properties, there is a limited supply of this asset type which results in residual values being greater than traditional industrial properties. The renewal rate for tenants in this property sector is also quite high, due in large part to the constrained supply of similar properties and higher-than-average replacement costs. Many of these properties are primed for future alternative uses, but most landlords find that re-tenanting is simply not an issue. Supply is tight, and tenants in this property sector are benefiting from the e-commerce boom that shows no sign of slowing. This creates a “stickiness” that more traditional industrial facilities sometimes lack and helps keep tenants at their current locations.
The renewal rate for tenants in this property sector is also quite high, due in large part to the constrained supply of similar properties and higher-than-average replacement costs.
CONCLUSION For many users, IOS is mission-critical real estate, meaning it is an irreplaceable part of a company’s business model. Because IOS sites are only useful insofar as they service a core business located somewhere else, they are generally only viable within metropolitan areas and close to roadways that can handle truck volume.
Finding suitable IOS properties can be challenging for industrial users, and will continue to be as long as these properties remain in high demand. If you’re an industrial company looking for outdoor storage, or an owner of a property with large land space, contact us today to explore your options!
About the ComReal Miami Industrial Team: The ComReal Miami Industrial Team has been assisting companies with their South Florida real estate needs for over 30 years. The industrial team specializes in the sales and leasing of industrial properties. Visit Warehouses Market and/or call 786-433-2380 for more information.