Investor interest in industrial outdoor storage (IOS) properties increased dramatically in 2022, as the property type’s importance in the global supply chain became more broadly apparent. Entrants into the sector are attracted by the macroeconomic factors driving occupier demand for improved surface lots, and by the decreasing supply available.
Global trade, e-commerce, and technological changes in the transportation sector are fueling a need for properties where equipment may be efficiently stored, but frequently moved. IOS properties are an example of high flow-through (HFT) properties, which are optimized for the efficient transfer of goods between transport modes (eg, truck to truck or van, rail to truck, ship to truck). Prices for these properties have increased substantially in the past several years, compressing entry cap rates in many markets to near parity with the general industrial sector. To achieve return targets, investors will require a fuller understanding of achievable rents for IOS properties, and at what rate these rents are likely to increase over a hold period.
Complicating this calculation is the potential for a global recession to slow demand from some occupiers of these properties. Investors with a nuanced understanding of how an occupier’s underlying cost structure creates demand for these properties – as well as the potential occupancy cost of the competing supply of alternate properties – will be much more likely to meet these return targets.
In the broader industrial sector, warehouse space is often viewed by tenants as a commodity – rent decisions are driven by a building’s storage capacity rather than its efficiency in moving cargo. Rents are often a function of replacement cost, as new supply provides occupiers with a mostly equivalent alternative.
IOS is critical to transport efficiency
A wide range of tenants use IOS properties, and these occupiers can be found throughout the US. IOS properties are improved lots used to store transportation and infrastructure equipment. They are mostly characterized by being fenced, lit and paved, though they may have small maintenance or operations buildings on them, as well.
Attributes of IOS properties targeted for investment vary considerably. Many investors view these properties as including any vacant lot that can accommodate the storage of equipment or bulk freight. We take a much narrower view, emphasizing the utility of the property in achieving transportation efficiency for logistics users.
We focus investment on transportation-advantaged IOS properties located proximate to ports and rail terminals to accommodate equipment used in these locations by transportation and logistics users. Target properties include truckload drop lots, drayage yards and port service yards, among others.
These sites are used to prevent or minimize delays caused by freight bottlenecks. This problem became especially acute in the first half of 2022. In addition, the rise of global e-commerce direct-to-consumer networks has heightened the need for these facilities in order to store and queue final-mile delivery vehicles.
In each of these cases, proximity between IOS properties and warehouses, ports, maintenance depots, rail terminals or individual consumers reduces fuel and labor costs and enables a higher “turn rate” for consumer goods. In logistics terms, stalled inventory is lost revenue to retailers. It represents a tremendous unrecoverable opportunity cost. In other words, a retailer can increase the speed of order fulfillment, reduce the time a product remains in inventory, and realize a higher profit per shipment through use of IOS properties.
Realterm’s Ports of LA and Long Beach IOS property in Wilmington, California
How high can IOS rents go?
Most investors have some idea of what land costs in a market are, and how much rent is needed to forego development for a non-IOS use
To the extent they interact with IOS occupiers in a market, they may also have a general idea of what a hypothetical user would be willing to pay in rent for a competitive property in a comparable market.
Due to the lack of publicly available comparable transactions, few investors have the depth of understanding of the value proposition of an IOS property as we do, given our informational advantage, informed by our market presence in this property type over several market cycles, proprietary transaction database, and serial transportation user relationships.
Investors who keenly understand the value proposition of specific IOS properties to each type of occupier, who understand the aggregate composition of occupiers in a market, and who understand how changes in technology will affect occupier demand will be well positioned to accurately estimate appropriate IOS rents. These insights will also allow for more accurate market leasing assumptions. Frequent transacting in this environment by investors with tools to track how the properties are used and how they fit in the occupier’s transport network will yield market insights allowing for stronger investment performance.
IOS value to an occupier
Understanding this efficiency is key to establishing a market rent for IOS properties. IOS properties are leased on a per-acre basis. A transportation company will not be willing to lease a property for more than what that property can save them across other parts of their transportation network.
In theory, equipment used to move freight should ideally be stored at its place of use, virtually eliminating transportation movements not directly required in moving goods from the manufacturer or distributor to the consumer. However, the value of the primary use of the land around warehouses, ports and other facilities precludes this alternate use.
Storing container chassis at a port would prevent use of that land for the more valuable function of offloading containers from ships. Storing trailers on a warehouse lot prevents the property from accommodating a larger building footprint, with the landlord foregoing potential rent.
“Prices for these properties have increased substantially… compressing entry cap rates in many markets to near parity with the general industrial sector”
The utility that occupiers obtain from IOS properties in lowering their network costs varies considerably. One type of cost is incurred by container shippers. A port may impose a charge for a container remaining on-site for too long (“detention”). In addition, shipping companies charge for the use of their containers and significant surcharges can mount if those containers are not returned within a certain time limit (“demurrage”).
IOS properties help shippers minimize these costs by shortening the time a container is in use and providing a port-proximate location where a container may be unloaded, then returned to the shipper. At a heavily congested port, a shipper will not be willing to pay an IOS rent higher than the combined cost of what would be charged for container detention at the port, and the expected demurrage fee for the containers.
In the case of final-mile warehouse occupiers, the availability of delivery vehicles timed for loading when a shipment is assembled enables a warehouse to shorten the time the vehicle spends at the dock and maximizes inventory turn at the warehouse. The warehouse occupier’s total use requirement for the warehouse facility is a combination of the actual storage and transfer attributes of the property, as well as the need for vehicles to move that inventory.
The maximum rent an occupier would be willing to pay to lease an off-site IOS property is a function of the primary use at the warehouse property. Assuming a lack of excess land, the occupier would not pay more than the cost to lease warehouse space to park these vehicles.
These are just two examples of occupiers who may require IOS facilities to make their networks more efficient. Others may include charging stations for electric vehicles or maintenance depots for trucks and trailers.
The balance of these users in a market indicates how high rents could rise. In markets where there are a large number of users who face significant costs for storage at the primary location they serve, rents could be exceptionally high, such as around the Port of New York/New Jersey.
Competing IOS supply dwindles
While the maximum rent an IOS occupier might pay is determined by what costs the property helps the user to mitigate or eliminate, the minimum rent a landlord will accept is determined by the alternate use of the property. Because IOS properties represent improved vacant land, many developers and municipalities consider alternative uses for these sites as being much more valuable.
In the example of a final-mile warehouse occupier, the developer of the warehouse likely maximized the leasable area of the warehouse relative to the size of its parcel of land because the revenue from the rental of warehouse space was believed to be higher than what could have been charged for renting the land, had it not been developed.
“Densely developed areas are locations where IOS properties are most critically needed. Final mile delivery facilities are being constructed near heavily populated consumer areas”
Municipalities often object to IOS use because it provides little tax revenue, given the lack of improvements on the land. More importantly, they generate loud and often polluting truck traffic, impinging on residents’ quality of life. As a result, few new vacant properties are approved for IOS use in urbanized areas.
Nevertheless, densely developed areas are locations where IOS properties are most critically needed. Final mile delivery facilities are being constructed near heavily populated consumer areas.
Port infrastructure is often tightly constrained because land around the US’s largest ports was largely developed long ago. In fact, many obsolete properties are being demolished to accommodate new warehouses. Depending on the size of the parcel these obsolete properties sit on, they may be more functional undeveloped than many investors realize.
The general trend over the past decade has been the continual disappearance of vacant land in areas where this land is most needed for the uses described above. As additional land is converted to other uses, the value of the remaining parcels to IOS occupiers is increasing dramatically.
If you do not receive this within five minutes, please try to sign in again. If the problem persists, please email: 
