As a leader in a value-added investment platform, our company’s appetite for industrial outdoor storage assets has grown in recent times as this type of niche ownership increasingly plays an essential role in supporting supply chains for the storage, maintenance and shipment of equipment and materials.
IOS properties are used by a wide variety of occupiers in the transportation, e-commerce, construction, materials and utilities industries and are an irreplaceable part of a company’s business model. In the supply chain, transport often represents more than 50% of the costs. The location of these properties is therefore a critical factor in keeping transportation expenses as low as possible, especially in an environment where fuel prices continue to rise. Many people are aware of rising gasoline prices, but in many places diesel fuel has seen a more dramatic increase.
Traditionally, IOS has been a type of ownership held largely by investors and mom-and-pop users; however, since 2020, these sites have increasingly attracted institutional and private companies. Last month, our company acquired two IOS yards for a total of $13 million in Orange and Los Angeles counties in Southern California, and we plan to aggressively add to our portfolio of assets over the next 18 months in key infill locations across the western United States.
Here are three main reasons why this type of very specialized asset is quickly becoming a must for investors.
The main expenses to consider when owning an IOS property are property taxes and insurance, which are low compared to the costs of ownership associated with other real estate sectors. Leasehold improvements are often minimal or sometimes non-existent. The largest potential capital expenditures are pavement repair/replacement, fencing, gates, lighting and security. While coordinating these elements can be demanding, the complexity is far less compared to many other real estate asset classes.
Reduced supply/increased demand
There is a large and complex demand ecosystem that includes trucks, trailers, containers, delivery van parking, truck terminals, equipment maintenance, contractor job sites and warehousing needs outside. Despite the critical nature of these facilities, the supply of available properties is unlikely to increase significantly anytime soon, especially as many municipalities tend to favor rezoning that decreases industrial uses and favors housing or tax-efficient types of products. In fact, the supply of IOS tends to decrease over time. Any well-located property that would be suitable as an IOS site is also well suited for higher uses such as a last mile distribution facility, or potentially a multi-family or mixed-use development.
Ease of possession
IOS properties are generally simple to manage, easy to rent, and reliable as a source of revenue and with higher average cap rates than fulfillment centers.
The perfect storm of growing e-commerce demand, no realistic path to increase the supply of IOS real estate, and the low investment and management requirements required attract larger investors and institutional owners in key markets. Domestic players have embraced IOS as niche real estate due to its low maintenance cost, reliable cash flow and favorable supply/demand ratio.
BJ Turner is the founder of Dunleer, a real estate investment and development firm specializing in value-added, niche-focused real estate investments in Southern California.