Opportunities for Investment in the IOS Sector

Source: IREI Newsline  BY LORETTA CLODFELTER (May 16, 2023)  
Industrial outdoor storage, or IOS, is a small but growing segment of the commercial real estate market that is receiving increased attention from institutional investors.

“IOS is a niche sector within the commercial property market that is experiencing growing investor demand,” noted John Maurer, senior managing director, head of portfolio management, at EverWest, in an interview with IREI. The attractiveness of an IOS investment is in part because it, like the industrial sector in general, has experienced strong operating results, rental rate growth due to favorable supply/demand fundamentals, and generally low capital expenditure requirements, he added.

A recent report from Green Street noted the rising popularity of IOS among institutional investors. According to the report, Industrial Outdoor Storage: A Beautiful Ugly Duckling, “the supply outlook for infill IOS appears to be one of the most attractive in all commercial real estate.”

According to Maurer, infill markets with high barriers to entry are likely to be among the most appealing for IOS investment. “We believe that rent growth will be greater in infill markets due to constraints on creating IOS sites in mostly built-out markets near seaports,” noted Maurer.

The occupiers of IOS space represent a varied profile of businesses, with as many types of occupiers as there are types of vehicles.

“All manner of users have demand for IOS,” said Maurer, “for applications such as tractor trailer drops and storage, storage and maintenance facilities, truck terminals, last-mile delivery vehicle storage, transshipment facilities, container facilities, and shipping channel and port storage.”

One thing that has made IOS investment attractive is that its returns are higher than those of traditional industrial space, supporting the investment thesis even as interest rates have risen.

“Going-in returns continue to be attractive,” said Maurer, “and the market has adjusted appropriately to a higher interest rate. That continues to make IOS investment attractive in the current environment.”
According to Maurer, EverWest believes early movers into this sector will benefit from a cap rate compression of 50 basis points or more, given growing institutional interest and current spread over similarly located industrial investments. He noted that IOS transactions tend to be smaller, so an aggregation premium may be achieved for portfolios of larger size.

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