Green Street: Infill IOS Delivers Superior Risk-Adjusted Returns

The niche commercial property sector of industrial outdoor storage (IOS) is seeing growing demand in line with the broader industrial property boom and this positive trend looks set to continue. 

“Investor demand for IOS has been buoyed by strong recent operating results, favorable long-term supply demand dynamics, and a de minimis cap-ex burden,” write Vince Tibone and Jessica Zheng in a Green Street report on the sector. 

“Given approximately zero net new supply of IOS sites near logistics nodes, demand and rent growth for well-located IOS should remain robust over time.”

IOS is defined as a site zoned for an industrial use where the tenant can store something outside, such as vehicles, construction equipment, building materials or containers.

Green Street believes that IOS sites in infill submarkets in particular are priced to deliver risk-adjusted expected returns “that are superior to those available on most other commercial real estate property investments, including traditional industrial”. 

The transportation and logistics sectors are the biggest users of IOS space. 

Proximity to seaports, intermodal hubs, airports, and highways are the main attributes third-party logistics companies (3PLs) weigh when assessing the desirability and feasibility of IOS sites, according to the report. 

Users of truck terminals, however, place more importance on the physical attributes of the buildings while storers of construction equipment and building materials care most about proximity to customers and job sites. 

IOS demand from container-storage tenants has come down from its Covid peak, and many class A industrial facilities have truck courts that can fulfil container and trailer storage needs now that the pandemic supply chain crisis has abated. 

A new potential source of demand could come in the form of charging lots for electric commercial vehicle fleets, but inadequate power capacity can be a constraint in most locations.

Meanwhile, the supply outlook for infill IOS appears to be one of the most attractive in all commercial real estate, according to the report. This is attributed to several factors: vacant land is effectively non-existent near most logistics hubs; entitlements are even harder to come by than traditional industrial; a portion of the IOS stock is developed into traditional industrial or a different higher-and-better use each year. 

Net new IOS supply is expected to be close to zero, or marginally positive, in infill submarkets in the coming years. 

“Overall, the supply landscape seems more favorable for IOS than traditional industrial, but new supply does remain a risk in many markets,” Tibone and Zheng write.

The greatest barriers likely exist in Los Angeles, Orange County, and New Jersey, in line with what is seen in traditional industrial. 

Supply barriers are much lower away from key logistics infrastructure, where likely use case shifts from transportation and logistics and more towards storage of vehicles and other items.