Pages from Colorado-Real-Estate-Journal_303252
Neustrom, Garrett. “Attracting institutional outdoor storage investors.” Colorado Real Estate Journal, 21 September 2022.
Institutional Outdoor Storage
The commercial real estate asset class known as Industrial Outdoor Storage (IOS) has seen a dramatic change in investor demand recently. These assets were traditionally owner/user properties, but this subset within industrial properties has experienced an influx of institutional and private equity capital flowing into the space over the past 24 months. These mission-critical facilities are typically zoned for heavy industrial, and are used for trailer, equipment, or material storage and can generally be characterized as smaller industrial buildings on larger land parcels with a floor-to-area ratio of less than 20%.
As institutional capital allocations have increased in the IOS space, it has led to the question of why now? IOS is a necessity for a variety of industries that make up the backbone of the US economy in the transportation, materials, and construction sectors. Unprecedented demand from these sectors has created a stressed supply chain, resulting in enhanced needs for outdoor storage. As yields compressed in traditional industrial assets, and the fundamentals for IOS continued to stay strong through the supply chain issues of the last 2 years, it was clear that institutional capital allocations had a place in this mission critical asset type.
Most IOS assets do not have tenants with credit profiles typically demanded by institutional investors. Other than the varying amounts of tenant security deposits, there are generally three main attributes of IOS that have helped offset a lack of credit tenancy. Institutional investors are able offset concerns by substituting credit for irreplaceable attributes of the real property; these are heavy industrial zoning, infill land, and widespread tenant demand. Heavy industrial zoning allows for equipment yards, material laydown, and trailer storage, yet this zoning category is in diminishing supply as these publicly “unattractive” characteristics generally won’t garner support from municipalities to expand this designation. Infill properties with excess land, regardless of zoning, have become increasingly difficult to find as much of this land was targeted for redevelopment into distribution warehouses or lighter use industrial parks. Finally, since outdoor storage is a core necessity in supply chains for many industries, tenant demand for improved outdoor storage land is extremely vibrant, providing owners of these assets a long list of potential tenants.
As IOS has become one of the next frontiers of opportunity for institutional capital, locations like Denver have become a focus for acquisitions teams. The market fundamentals of Denver continue to attract investment groups who are aggregating national IOS focused portfolios. Denver’s IOS sector has more supply than coastal locations but still boasts increased rental rates, low capital expenditure requirements, and heavy tenant demand. Industrial Outdoor Ventures (IOV), an institutionally backed operator that has acquired 8 IOS facilities in the Denver area since 2018, had the following to say about the Colorado market: “Amongst all of our target markets, IOV would definitely put Denver near the top of that list given the strong fundamentals and consistent growth that we’ve experienced firsthand since we entered the market in 2018 with the acquisition of 4780 Vasquez Blvd, Denver, CO. We’ve continued to see incredible demand for the product type even with rapidly rising land values across the board.”
In the Denver MSA, outdoor storage land is being rented for between $4,500 – $6,000 per acre, per month. In even more supply-constrained markets such as South Florida and the Inland Empire of California, these rates can exceed $30,000 – $50,000 per acre per month. Owners of IOS properties can realize these rental rates with minimal capital improvement to their property and typically have to offer low amounts of tenant incentives (tenant improvement dollars, free rent, etc.) in comparison to traditional industrial product.
The tenants in the IOS space are extremely sticky, and although they are only signing 5 to 7-year leases, it’s not uncommon for tenants to remain at these facilities for over 15 years. Even during the great financial crisis, vacancy rates were nearly half of the rest of the industrial sector. The expectation of longer-term tenancies allows owners to take advantage of yield structures that are like traditional industrial without the large tenant improvement costs.
Industrial Outdoor Storage will continue to support industries at the backbone of the US economy, making it a fundamentally important asset. As this property type continues to be in diminishing supply, the flood of institutional capital will only help to preserve these assets and standardized regulations in municipalities. The attributes that support investment into the space continue to be fundamentally true as rates continue to increase in Denver. Denver’s continued population growth and urban sprawl will keep IOS as a front runner of necessity. The institutionalization of industrial outdoor storage will only benefit the asset class and help support industry in Denver’s economy for years to come.
