Industrial Outdoor Storage Can Be A Siren Song, And The Inexperienced Should Beware

Investors today are finding it difficult to resist the siren song of industrial outdoor storage, that alluring array of fenced-in parking lots for trucks. 

IOS has rapidly become one of commercial real estate’s hottest asset classes as a flood of new money has sent prices sky-high.

“You create a buzzword, make it sound sexy and interesting, and everybody wants to have it,” Blau & Berg Senior Executive Director Michael F. Schipper said. 

But investors looking to enter the space may crash on the rocks of an industry that is trickier — and less like the rest of the industrial market — than first meets the eye, and the talent pool of people with expertise in navigating the hazards is limited.

The sector is exploding. In just the last few weeks, alternative investment specialist GreenPoint Partners launched a $500M investment platform, adding to an estimated $200B market nationwide.

But despite an increased spotlight and billions of dollars, IOS still has a mom-and-pop feel. 

“There aren’t many people who specialize in it, and it’s a nuanced industrial sector,” said Industrial Outdoor Ventures CEO Tom Barbara, who began buying up properties in 2005. 

The general concepts, financing and trends can be picked up by those with general real estate experience. But true success in industrial outdoor storage requires more aggressive and time-consuming approaches to acquiring property, and in-depth understanding of trucking and logistics that many new buyers lack. 

Inexperienced and ill-informed buyers don’t understand or appreciate the cyclical nature of the site, or how a location with an odd alignment or placement a few more miles down the highway can significantly impact long-term value, Schipper said. He noted that a pair of 4-acre sites, one rectangular and the other in an odd shape, may seem similar on paper, but the layout can significantly alter how many trucks can park there, multiplying its potential. 

“Part of the issue that I’m seeing right now is lots of people out there looking to buy sites aren’t talking so much to people who use them, but those who have acquired them,” Schipper said. “You need to talk to truckers, talk to end users and have a finger on the pulse.”

New talent needs to understand some of the different metrics and pricing that go into IOS, Barbara said. The first is the seemingly absurd rental rates, which tend to be based on floor area ratios of small covered buildings and massive truck lots or parking facilities; $250 per SF rents seem ridiculous compared to traditional industrial rents until the land factor is taken into account. And pricing tends to be on a per acre, per month basis, a different calculation than most industrial brokers are accustomed to discussing.

But perhaps the most striking difference is the relative informality of the industry. Traditional industrial tends to be filled with established players, multinational retailers and increasingly sophisticated data analytics. IOS owners tend to be small, often family firms and aren’t as well-connected or accessible. 

“There is limited data that is widely available or third-party resources/websites that actively track IOS specifically,” NorthMarq Commercial Associate Mark Grossman said. “This creates a higher barrier of entry, as compared to other asset classes, as it takes more time to learn and understand the space.”

There’s also the matter of long-term value. Schipper found that some sites renting for a few grand a month may have exploded in value during the pandemic and now charge $20K-$30K. Savvy buyers need to understand that prices can deflate as fast as they inflate. They also need to make sure they grasp local zoning issues; he’s noticed many buyers realizing too late that they can’t use sites for the type of storage they intended.

“Recently, there’s been a lot of irrational exuberance,” he said. “It’s sort of like hysteria: I better do it now, because if not, someone else will.”

Ideally, bigger funds or teams interested in IOS hire someone with extensive trucking and logistics experience, he said.

Daniel Laub, a co-founder of Zenith IOS, which launched in 2021 and now employs 20 people, stumbled into the industry in a sense while working on a self-storage deal with his co-founder. He saw the opportunity and began to do more in-depth research into the space. Starting with deals in Dallas and around Florida, he quickly put together a pipeline of deals that’s now worth $700M, covering 45 assets across 20 markets. 

Laub said 24 months ago, brokers didn’t really understand what Zenith was looking for, and now, the “Marcus & Millichaps of the world are putting out white paper memos on the space.” It’s a market that’s transformed, but it’s still more about small regional players with $20M to $50M, as opposed to truly national portfolios, Laub said. 

“IOS sites at $12M at a time are not that interesting from the institutional investor perspective,” Laub said. “But if you can put a portfolio together, you know, a billion plus, which we're close to today, then it becomes a different conversation.”

That push to assemble larger portfolios is making IOS as an industry search out more buyer and broker talent. But finding good talent is a challenge, Laub said, especially in a marketplace without lots of experienced staff.

Many of the deals Zenith has done to acquire assets focus on pivotal moments: An owner passes away and their family doesn’t want to hold on to the site, or business restructuring creates an opportunity to pare down land ownership or do a sale-leaseback. Brokers and buyers need to be able to work with owners who may not have much of a real estate background.

And beyond the challenge of finding knowledgeable buyers, larger entrants into IOS need staff for site identification, closing, asset management, leasing and accounting. Zenith has found that post-closing, many deals require some kind of modest capital expenditure spending, which requires a proper, experienced team if you’re operating across multiple markets. 

The rocketship of land values has tapered off in recent months, Laub added, so he expects additional opportunistic buying in the near term. He sees IOS as a “multi-100-billion-dollar market,” with more competition buying space and driving up assets. And that requires a lot of patience and hands-on work.

“The biggest difference in coming from any other commercial sector is the ticket size is smaller, which creates a totally different mindset,” Laub said. “I come from the New York City real estate world, and nothing there costs $10M.”

CORRECTION, APRIL 17, 11:45 A.M. ET: An earlier version of this story had the incorrect dollar figure for Zenith IOS’s pipeline. It has been corrected.