A surge of capital and rapid expansion has been driving the industrial outdoor storage market. Still, Colliers said in its most recent IOS market report that investors should beware that rushed decisions could lead to distress.
The report said zoning is the sector’s most significant barrier to entry, impacting both current use and future leasing potential. Aggregators pursuing volume for eventual recapitalization could underestimate zoning risks and create challenges. In addition, investors must consider how tax reassessments and insurance costs may affect projected rents, particularly in Florida and California.
“Despite the sector’s continued strong performance, thorough due diligence remains essential in all aspects of potential investments,” said Colliers.
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The CRE firm added that the market separates into net lease investments and operational real estate assets. Net lease properties with national tenants are attracting retail investors looking for stable, low-maintenance income. On the other hand, operational assets require hands-on management and regular capital expenditures.
Moreover, as the IOS market grows, the equipment rental sector has become one of the most common entry points for buyers because it is widely available and appeals to investment committees. The four largest publicly traded players in this niche include United Rentals, Ashtead, Herc, and H&E Equipment Services. During the past five years, the primary demand for equipment rentals for all four companies came from contractors and industrial users, while residential and do-it-yourself renters contributed only a small portion of total revenue, said Colliers.
The market is highly fragmented and consolidating, with only United Rentals and Ashtead commanding a market share of greater than 10%, the report said. Equipment rental companies are focusing on population growth areas, largely in the Sunbelt and limited locations in the Midwest. Ashtead has bought more than 20 companies in the past years, while United Rentals made the largest acquisition with more than 100 branches in both the Ahern Rentals and General Finance transactions.
With each acquisition, a significant rightsizing occurs, said Colliers.
“For example, when United Rentals in 2021 bought Ahern Rentals and General Finance, it added 212 locations; however, the total only increased by 167 in 2022,” said Colliers. “Investors need to consider the industry’s acquisitive nature when underwriting the renewal probability for any given investment.”
A steady rise in market rents within the IOS sector has lowered cap rates for equipment rental properties. As market rents surpass in-place rents, buyers are adopting a more aggressive approach, underwriting higher renewal rents to capitalize on future growth, said Colliers.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
