Investors Searching for Price Ceiling on Industrial Outdoor Storage Sites Amid Red-Hot Competition
On January 20, Stan Johnson Company's Zach Harris and Melissa McKenzie participated in an online webinar hosted by Bisnow where trends and characteristics of the Industrial Outdoor Storage sector were discussed with panels of experts. Listen to the event replay here.
Originally published by Bisnow
As the industrial outdoor storage sector drafts on the incredible strength of the distribution center market, landlords are doing everything they can to capitalize on the unprecedented demand, from both investors and tenants.
As a property type with fairly low maintenance costs and “sticky” tenants, industrial outdoor storage has become a darling of institutional investors, large private equity firms and anyone with an interest in industrial real estate and a desire to diversify their portfolio, panelists at Bisnow’s Industrial Outdoor Storage webinar on Jan. 20 agreed.
“That’s one of the main reasons we’re here, because interest in IOS has changed dramatically,” Northbridge principal and Mid-Atlantic Region head David Aisner said as the event’s chat window lit up with attendees trading contact information. “There’s an overflowing appetite for all things industrial, and this is clearly a subclass of industrial, and is driven in large part by the same demand fundamentals, so you can feel good about capturing the same tailwinds.”
Given the similarity in demand fundamentals and the fact that new IOS is very rarely developed, rent is rising even faster than it is for warehouse space, CanTex Capital CEO Romit Cheema said. Rents have risen so fast that leases signed five years ago are now far below market rate, panelists agreed. Whereas lease flexibility has become a key tenant demand in the office market, landlords are the ones seeking shorter terms in both traditional industrial and IOS.
“As long as the rent keeps increasing at the rate it is, I’d rather have lease terms that are shorter so we can roll the rent [over] sooner,” Stan Johnson Co. Director Zach Harris said.
Panelists expressed very little concern that potential tenants would start to push back against continually spiking rents, citing the fact that price increases have hit every other part of the supply chain, and for elements like shipping containers, the increase has been much steeper than rents. Considering how reluctant tenants are to give up an IOS site once they have secured one, landlords might actually have difficulty figuring out the upper limits of market-rate rents these days, Cheema said.
And yet, demand from investors might still outstrip what tenants are generating, especially considering that some major retailers, including the all-important Amazon, now seek to own more of their supply chain-related real estate to enjoy the benefits of its rising value. Occupiers looking to own IOS are among the most aggressive bidders in the market because of the small percentage of logistics cost that real estate, even expensive real estate, accounts for.
“We often compete against and lose to users, because they don’t need to solve for return [on investment] like we do,” Cheema said. “But it makes us work a little harder to try and find off-market acquisition opportunities.”
Aside from its attachment to logistics, IOS gained popularity as an investment class because of the yield that could be obtained with relatively little effort. But as investors and users both flood the space, yields are indeed flattening as cap rates shrink, panelists agreed. Yet none of them doubted that the market will remain hot enough in the next few years for those investing now to find willing buyers upon disposition.
The recently passed infrastructure bill could add even more fuel to the fire.
“With the infrastructure bill getting passed, what we’ll see over the next six to 12 months is that as projects get started, these lots are perfect for lay-down spots as construction projects get put together,” Timber Hill Group founder and Managing Partner Cary Goldman said. “So there could be a lot more competition.”