Industrial Outdoor Storage is Irreplaceable
The Economics of Industrial Outdoor Storage: A Supply-Constrained Investment Opportunity
The IOS sector presents unique investment characteristics that warrant careful consideration from a real estate economics perspective. The fundamental driver of value in this sector stems from its relationship to transportation costs, which comprise 45-55% of total supply chain expenses according to Prologis data. This cost structure creates significant rent elasticity - tenants can justify higher rents if the location reduces transportation costs.
The supply constraints in this sector are particularly noteworthy from an investment standpoint. Three key factors restrict new supply: the scarcity of vacant land near logistics hubs, challenging entitlement processes that exceed even traditional industrial development hurdles, and the continuous conversion of existing IOS properties to higher-density uses. These constraints create a natural barrier to entry that supports long-term value appreciation.
The tenant profile of IOS properties centers primarily on third-party logistics providers (3PLs), who require proximity to critical infrastructure such as seaports, intermodal hubs, and major highways. This location dependency creates distinct submarkets where properties command premium rents due to their irreplaceable nature.
From an operational perspective, IOS properties typically employ triple-net lease structures with terms ranging from five to ten years and annual escalators of 3% or higher. The low building-to-land ratio (generally under 20% FAR) results in minimal capital expenditure requirements compared to traditional industrial properties, enhancing cash flow stability.
The market structure remains highly fragmented, with non-institutional owners controlling the majority of properties. This fragmentation creates opportunities for sophisticated investors to acquire properties below market value and implement professional management practices to enhance returns.
Looking forward, the sector faces both opportunities and challenges. The potential emergence of electric vehicle fleet charging could create new demand, though significant infrastructure investments would be required. Meanwhile, the normalization of supply chain disruptions has reduced some pandemic-era demand for container storage.
From an investment perspective, infill IOS properties appear positioned to deliver superior risk-adjusted returns compared to traditional industrial assets, particularly in supply-constrained markets. However, properties in less strategic locations may deliver more modest returns in line with broader commercial real estate averages.
