'Best Buying Cycle' In IOS Real Estate Is Here, Primed By Values At Ports And Inland Growth

The flood of new capital into industrial outdoor storage has retreated from the recent boom due to today’s cost of debt. But long-term buyers and specialized investors see the next year as one filled with buying opportunities, including in high-demand port regions and up-and-coming inland markets, for those with capital access. 

Significant tailwinds have bolstered inland ports and adjacent IOS space, while port markets, which saw skyrocketing prices and rising rental rates, have come back down to earth, offering buying opportunities. 

“The next 12 to 24 months are going to be probably the best buying cycle that we've had in the IOS space,” said Ben Atkins, co-founder and CEO of Zenith IOS, an investment, development and management company focused on IOS that formed in 2021. 

In recent months, inland IOS markets have seen rapidly increasing activity and corresponding rent increases, making these assets more attractive acquisition targets.

Powered by onshoring and reshoring, transportation investments and a remaking of supply lines and logistics plans, this shift adds another source of future growth and demand to a sector that saw a run-up in sales volumes, prices and interest due to booming pandemic-era e-commerce activity. It’s helping IOS outperform other parts of the industrial market, which faces a leasing slowdown and recalibration.

“I would characterize all of these IOS markets to be fairly strong compared to general warehouse,” Realterm Managing Director and Senior Fund Manager Stephen Panos said. “We’re seeing outperformance on the demand side.”

Zenith IOS conducted a study of port versus inland IOS markets and found a decline in asking rents for port markets over the last 18 to 24 months. Seattle had seen asking rents drop between 10% and 20% during that period.

At the same time, the study noted that major inland ports, such as Chicago, Atlanta and Dallas, where growth was more muted during the early Covid period, have seen anything from 5% to 15% asking rent growth. Zenith didn’t provide more exact figures from its proprietary rent database, and third-party data on the IOS market is difficult to obtain. 

“Markets like New York, New Jersey and Los Angeles, had an enormous run-up during Covid, and now you’re seeing a decline from that incredible high,” Zenith principal and head of investments Alex Olshansky said.

The value of port-adjacent space in high-cost, high-barrier-to-entry coastal markets became frothy from a price perspective. During the recent period of global instability and shipping chain challenges, including the war in Ukraine, Panama Canal backlog and Red Sea tension, these port markets saw a correspondingly larger drop in rent than in markets with less of a dependence on overseas imports. 

That overseas shipping anxiety has swung the pendulum back towards manufacturing and shipping investments domestically and in nearby countries. In recent months, inland IOS markets have seen rapidly increasing activity and corresponding rent increases, making these assets more attractive acquisition targets.

The nearshoring and reshoring trend has reshaped inland ports, especially those on the U.S.-Mexican border, and is expected to continue doing so. Recent data suggests U.S. investment in manufacturing was up 63% year-over-year in 2023, and foreign direct investment in Mexico spiked 200% year-over-year. It’s a shift that’s likely to evolve considerably in the next five to 10 years, Panos said, which will likely reroute and reorganize supply chains, boosting different IOS markets. 

“We’re pretty bullish on it,” Atkins said. “We think that that will be a big demand driver, a big tailwind for industrial real estate, for the foreseeable future.”

Despite weakness in the trucking sector, such as the bankruptcy of Yellow Trucking, the new demand for shipping for manufacturing, construction materials and the auto industry is making up for the loss and keeping noncoastal IOS in high demand. Most of the property sold off in the Yellow bankruptcy proceedings went for high prices. Many midwest IOS markets, which have low population growth and fundamentals that in other asset classes would suggest smaller rent growth, have shown steady, strong growth, said Panos. 

Joliet, Illinois, for instance, 40 miles outside of Chicago, boasts highway connectivity and the convergence of six major railroads. The city has seen consistent industrial deal activity and new spec warehouse construction.

That strength goes hand in hand with increased consumer demand and the effort by companies to meet that demand in new markets. It’s creating demand for a more robust, expansive IOS network.

“Generally what we're seeing is expansion,” Panos said. “We’re seeing little, if any, contraction.”

Couple that with other data points that inform IOS investor decisions — Zenith looks at multifamily growth, population growth and density due to close correlations between increased need for consumer goods and e-commerce — and border markets like Otay Mesa and El Paso have benefitted. Perhaps the most significant IOS market impacted by these trends is Laredo, Texas. The port city on the Rio Grande River has become the nation’s busiest port, with numerous new warehouses breaking ground and a 3% industrial vacancy rate.

And perhaps even more valuable to IOS growth, trade between the U.S. and Mexico is much more than even the U.S. and China, Timber Hill Group Managing Partner Cary Goldman said. The flow of trucks remains relatively even in both directions, creating much more demand for parking and truck yards. 

“There’s a bottleneck,” Goldman said. “You have all this product coming in from Monterrey and it probably does want to get to Austin or Dallas, or somewhere else in Texas, and Laredo is this entry and exit door.”

But while that manufacturing growth will create an outsized demand for outdoor storage space around U.S. plants and factories, that doesn’t mean there won’t also be an outsized demand for distribution and logistics real estate centered on international trade.  

In fact, the decline in port market rents tracked by Zenith will likely be a massive buy signal for IOS investors. Panos agrees, seeing it as a normalization, a chance to buy high-quality collateral cheaper with less competition, not a “catching falling knives” scenario.

“We're more bullish now on buying in the coastal markets than we ever have been because they've repriced,” said Atkins. “We're actively looking in those markets. The buying opportunities in the coastal markets are stronger than ever.”

Coastal markets, the areas with the highest density and highest land values, always feel too expensive, said Panos. But while it may seem like rents have nowhere to go, they’ve historically, steadily, risen. 

“I do think it's probably closer to the beginning than the end in terms of capital appetite for the sector,” Panos said. “We think this sector is three times larger than general warehouse. It’s a large, investable, universe.”

Zenith found that the IOS market still remains decentralized, both in terms of ownership and geography. Within the roughly $300B market, the top 50 markets only comprise $100B of value. 

“Opacity equals opportunity,” Atkins said. “Early movers don’t want to make it easier for others to see the opportunities.”