AN INTRO AND BRIEF INVESTMENT GUIDE TO INDUSTRIAL OUTDOOR STORAGE (IOS)
IOS (Industrial Outdoor Storage) has historically been hidden in plain sight to most real estate investors, often seen as a under-utilized property waiting for future redevelopment or destined to be vacant dirt for the foreseeable future. More recently however, particularly since 2021 or so, these overlooked properties began to bud as their own niche asset class to the broader investor community. While some had known its value for decades, interest by large investment funds and institutional players skyrocketed. This increased attention is due to several factors such as:
Changing consumer habits (think of the stacks of Amazon packages at your door) which have led to increased port traffic in coastal markets and evolving transportation networks for deliveries across the country and within the urban core
An influx of sophisticated investment capital looking to consolidate the ownership into large portfolios of IOS
Efforts by jurisdictions to limit or outright prohibit IOS sites due to:
city governments viewing these as unsightly uses;
limited or no sales tax generation (as opposed to a retail building for example);
absence of significant building square footage which reduces assessed values of the property from which property tax is derived;
the changing supply and demand relationship due to these factors above
Below is a basic intro this investment category, highlighting some of its definitions, characteristics, and what investors might look for when investing. If any additional questions or if you want to discuss the Colorado IOS market, reach out to ben.swanson@quiverinvestments.com anytime.
WHAT IS IOS?
Industrial Outdoor Storage (IOS) refers to properties used primarily for the storage of heavy equipment, raw materials, tractor trailers, last mile delivery fleets, and other industrial-related assets. They require their own specific zoning within industrial categories and have other unique attributes that differentiate their appeal to tenants than one may otherwise expect. You may also sometimes hear of a sub-category of IOS referred to as Industrial Service Facilities (ISF) which (for all intents and purposes) is IOS, but has additional infrastructure that supports industry such as vehicle repair and maintenance facilities, truck terminals or cross-dock facilities as a few examples. Overall, IOS is a niche within the larger industrial category for which for a large warehouse is either not necessary, practical nor affordable for businesses who have the ability to store their product or equipment outside.
General Characteristics of IOS:
Tenants: Commonly used by logistics companies, construction firms, container storage, oil & gas companies, last mile logistics providers, operators of large fleets (buses, delivery vans, etc.) and similar industries requiring outdoor space for heavy equipment, bulk materials, etc.
Location: Typically found in industrial areas of large cities, near highways, ports, or logistics hubs and preferably in pockets where other IOS properties are located.
Size: Typical size ranges from 2 to 7 acres in size, however there are plenty of examples which exceed this size, particularly for tractor trailer storage as an example.
Building Coverage: Typically no more than15% to 20% of the land area being covered by building square footage, or have no building at all.
Infrastructure: Basic on-site infrastructure includes improvements such as fencing, lighting, security and sometimes paving, but minimal built structures as the yard itself is the focal point of the property’s value to tenants. From an off-site perspective, the roads leading up to the site should have adequate sizing to allow ease of transportation in and out of the property.
INVESTOR CONSIDERATIONS AND OPPORTUNITIES FOR IOS
Zoning Regulations: Ensure the property is zoned for industrial use and allows for outdoor storage. The specifics around outdoor storage is a highly nuanced component of the zoning of which an investor should pay particularly close attention to.
Proximity to Transport Networks: Close proximity to urban centers, highways, railroads, ports and other transportation networks significantly increase the property’s desirability.
Maintenance Costs: While on the surface these properties may appear as low maintenance or low capex investments, investors need to consider costs (and responsible parties) for yard maintenance, paved surface R&M, environmental compliance, stormwater maintenance and various other costs which simply due to size of the yard can be outsized relative to other asset classes.
Environmental Factors: Consider the potential environmental impact and necessary compliance with local regulations. Often the tenants that occupy IOS/ISF work in industries or house equipment or materials that have the potential to have an environmental impact on the property.
Economic Resilience. The businesses which occupy these properties truly are essential businesses, helping sustain the functionality of the cities in which we all live.
Evolving Highest & Best Use: Particularly for those locations located further from urban centers, as development expands outwards, the highest and best use of some of these IOS sites may evolve to more intensive uses with development potential, generating excess returns over a longer investment horizon.
Decreasing Availability of IOS: This is probably the single most important consideration that supports investment in this asset class. Counties and municipalities continue to limit or prohibit the development or expansion/modification of IOS properties within their purview. As availability continues to diminish, increased investment returns will follow as rents increase over time.
Investing in IOS offers unique opportunities for investors but investors should not be fooled by oversimplification. When considering such investments, it’s crucial to evaluate factors like zoning, location, tenant stability, future development potential, and compliance with local regulations.
If our team at Colorado IOS can be a resource and assist you in your pursuit of one of these investments, we invite you to reach out for a conversation.