The Robust IOS Niche is Facing Headwinds

New industrial outdoor space (IOS) supply is scarce, leading to lopsided demand-to-supply dynamics persisting within the sector. Now, a new report from Marcus & Millichap points out a few headwinds that this niche is facing after phenomenal growth.

Availability among existing IOS properties stands at under 3 percent nationally, well below the broader industrial sector’s record low of 3.6 percent, according to the report.

Supply is highly limited, with IOS acreage comparable to 5 percent of total industrial square footage as of March. Sites for new IOS space are even harder to come by, especially in more populous areas.

The formation of nearly 3.2 million households over the 24-month span ending in March — the most of any two-year period since 2002 — coinciding with an 18 percent jump in online retail sales, underpin tenant demand for IOS space.

In short, its metrics remain solid, but “the segment is not fully insulated from economic headwinds,” according to Marcus & Millichap.

For starters, the combined 500-basis-point lift in the overnight lending rate by the Federal Reserve since March 2022 has jolted businesses’ inventory accounting costs, which in particular are affecting smaller businesses with weaker credit and more expensive borrowing terms. This group comprises a notable share of the IOS tenant pool.

“Even with IOS metrics piquing the interest of private capital and industrial developers, operational and financial hurdles are impeding many from entering the space alone,” according to the report.

IOS sales activity has slowed so far this year relative to peak levels in 2022, Marcus & Millichap also noted.

“Instead, several joint ventures were recently created to pool the capital and expertise necessary for creating new IOS platforms.”

Adam Deierling, SIOR, Managing Partner, West Harbor Capital, tells GlobeSt.com that the IOS sector of industrial real estate has followed the same path as the overall industrial market slowdown.

“Secondary and tertiary markets of this segment may be in for a longer-term recovery compared to the infill IOS markets’ less fundamentally sound demand drivers for those ‘perimeter plus’ locations,” he said.

“Once the overall economic slowdown turns the corner, indicators point to a rebound in demand in the IOS space once the PMA [Pacific Marine Association] agreement is ratified.”

Deierling said retailers shifted some of their traditional West Coast targeted landings to the Eastern seaboard to avoid union slowdowns during the PMA issues. Once the agreement is inked, those retailers will once again route their products back to the west coast ports based on efficiencies to market and local consumer demand.

“It’s hard not to bet on the long-term need for IOS properties based on the nearly 25 million consumers who have become accustomed to same day/next day delivery here in Southern California,” he said.

Reid Hanner, Partner with Foundry Commercial, who specializes in industrial brokerage, and in particular, IOS / ISF deals, tells GlobeSt.com, “We see IOS demand continuing even with port volumes slowing.

“The tenant pool remains deep, drawing users from multiple industries including construction materials, pipe supply, heavy equipment, concrete precast, auto, and landscaping, in addition to traditional trucking companies. The broad tenant mix has kept velocity high across all our markets, and we see this trend continuing.”