Finding New Investment Value in Industrial Outdoor Storage

There is substantial pressure on the nation’s commercial parking shortage driven by the booming retail sector, according to a recent report from Marcus & Millichap.

Given that online retail sales have surged 85 percent, the number of delivery vehicles in need of these spaces has multiplied well beyond 2019’s truck-to-parking spot ratio when there were 900 light-duty trucks registered per commercial parking spot.

This congestion led to a record $95 billion in financial losses in 2021 — and an uptick in demand for industrial outdoor storage facilities.

Nowhere is the challenge more pronounced than in the West. Limited truck parking availability there generates the most expensive pricing for IOS sales out of any region in the nation. Entry costs across California, for example, average around $2.4 million per acre, higher than any other state, Marcus & Millichap reported.

Meanwhile, in the Northeast, eight of the 10 states with the most lopsided truck-to-parking spot ratios in the country exist.

Still, strict zoning requirements and high population density have limited opportunities for IOS investment here, according to the report. Nonetheless, institutions raising over $2 billion for acquiring IOS properties as of March.

Seeking more cost-effective parking solutions, many industrial outdoor storage (IOS) facilities come into play. Typically viewed as rudimentary scrap yards and infill lots prior to the pandemic, they are being transitioned into multi-faceted service properties to satiate demand from a wide variety of commercial fleet operators for consistent parking, according to the report.

Industrial outdoor storage (IOS) reduces tenants’ downtime as they typically feature paved lots and floor-to-area ratios under 30 percent, so these IOS facilities have been sought after by fleet managers to consolidate supply chain operations.

“Low coverages enable end-users — including non-e-commerce tenants like public utilities providers and equipment rental companies — to manage operations, conduct client-facing activities, and store vehicles and materials all in one compound,” Marcus & Millichap said.

“Maintenance costs are also lower than traditional warehouses, offering tenants the flexibility to adjust storage capacity to free up additional space for parking.”

However, new IOS properties remain scarce. The optimal IOS site locations tend to be along residential, commercial, and heavy industrial corridors, where the development of more traditional property types is often deemed more applicable by zoning authorities.

Opportunistic investors and industrial property managers are frequently re-purposing dirt lots into sophisticated commercial parking and storage solutions and their value-add potential enhances IOS investment prospects, according to the report.

“In early IOS searches, clients were on the hunt for candidates boasting an institutional background and IOS expertise,” according to Lisa Flicker, Managing Partner – Head of Real Estate, Jackson Lucas. “Appealing candidates were a rare find, given the market’s dominance by small-family outfits unacquainted with basic financial metrics like cap rate calculations.

“Fast forward to today, where niche asset classes are gaining unprecedented traction, including for parking, prompting larger firms to plunge in headfirst. An evolution has taken place, where I can see an invigorated spirit of exploration among sophisticated teams, driving them to unearth ripe opportunities.”

But securing the location is not enough because there are complex underwriting inputs that “complicate” the construction financing process, according to the report.

“Amid high interest rates, assets in which renovations can capture outsized returns are rising to the top of investors’ priorities. IOS investment typifies this trend within the broader industrial sector,” Marcus & Millichap assessed.

Adding to the attractive proposition are rezoning and upgrades, which have helped generate “outsized returns” for many IOS buyers in recent years, the report showed.