Industrial outdoor storage is the next real estate-related hurdle on the horizon for supply chain executives. Are you prepared?
A relatively new asset class in its own right, industrial outdoor storage (IOS) covers the transportation-related infrastructure that makes supply chains work. Currently. the specific definition of IOS can vary based on who is being asked and where they operate.
Generally, an IOS site is made up of low-coverage industrial land with either no buildings or much smaller buildings than those that would be found in a traditional industrial property. The IOS umbrella can include everything from simple parking lots to more complex service and repair facilities.
The current IOS market
As supply chain networks continue to increase in scale and complexity, particularly in dense port adjacent areas such as Newark/Elizabeth in New Jersey and Long Beach in California, the value of IOS sites has skyrocketed. For example, according to data from CoStar, sales for truck terminals, a major IOS sub-asset class, reached $1.74B in 2022 - a substantial increase compared to previous years.
Beyond dedicated IOS sites, building owners are also changing their perspective on how they value parking at their facilities as a result of the increases in IOS pricing. In the past, buildings were constructed as large as a site would allow to maximize the value that traditionally came only from the developed part of the land. Today, as parking becomes more valuable, developers are taking a more serious look at their parking allotments. In some cases, since parking is much cheaper to build, developers may look to construct smaller buildings on their sites to maximize the available parking. This sentiment would have been unthinkable just a few years ago but shows how far the asset class has come in recent history.
While the market is favorable to developers and building owners, the same factors that make it so lucrative to owners present unique challenges to supply chain-oriented tenants.
Unbalanced supply and demand
Unlike industrial building development where millions of square feet of space are brought to the market each year to meet increasing demand, IOS supply, particularly in crowded port markets, is actually decreasing as demand increases. Two factors are conspiring to create this phenomenon.
First, industrial and, to a certain extent, multifamily development in many of these crowded markets continually takes ideal sites off the market. While industrial development is considerably more expensive than developing an IOS site, the long-term payoff from an industrial building can be higher. Depending on an investor’s goals and financial capabilities, vertical development instead of leasing the space as an IOS site might be the better choice.
The second complicating factor in the unbalanced supply and demand equation is the same ‘not in my backyard’ backlash that has plagued industrial development in many markets. IOS sites can bring the same level of truck traffic as a traditional industrial building but without the same tax base contributions. In addition, the aesthetics of a lot filled with trucks or other equipment can often ignite opposition from concerned citizens putting pressure on local officials to reject project plans. After all, very few mayors get reelected by bringing unattractive spaces to towns.
While critical to local supply chains, the idea of a new IOS site in a town can often be too much for residents and elected officials to consider. As a result, it will be tough for markets to add significant new IOS space in the coming years.
Navigating the IOS market
The challenges surrounding the nascent IOS market do not change the fact that supply chain operators still need to get products from Point A to Point B. So, how should supply chain operators approach the complicated IOS market to find the space that they need?
- Understand specific supply chain needs. Operators need to evaluate exactly what they need from IOS sites in terms of location, size and amenities. If they can afford to locate the sites outside of the more competitive submarkets, they will save considerably. Prioritizing other non-negotiables including lighting, security and paving, can also help quickly identify potential sites.
- Evaluate local zoning and regulations. The challenges surrounding local zoning make it critical to understand what is allowed on land and what is not. Just because a site was used as IOS in the past, does not mean it is zoned for IOS. The nature of the asset class makes it prone to grandfathered uses that might not align with zoning. Similarly, if a space is being acquired or leased and was not previously used for IOS, it is critical to confirm that it can actually be used as an IOS site aligning with the needs of the operator.
- Work with a team that understands the market and has local contacts. The newness of the IOS market means that off-the-market sites might exist in a given market that can only be unearthed by an experienced and knowledgeable local commercial real estate team. In addition, local experts can help navigate the complicated town dynamics often at play in IOS discussions and find fellow local experts to assist in all aspects of the process.
By following these tips and remaining flexible, supply chain operators can navigate the challenges of the IOS market and find the space they need to keep their operations running smoothly. As the market continues to evolve, staying informed will be critical in keeping ahead of the competition and ensuring opportunities can be capitalized on as they emerge. With the right approach, supply chain operators can overcome the hurdles of the IOS market and position themselves for long-term success.
