Trends Watch: Industrial Outdoor Storage

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Ned Mahic, CIO, 9606 Capital.

What is your outlook for investing in industrial outdoor storage (IOS)?

The outlook for IOS remains predominantly positive. There are several reasons for this optimism.

For starters, the supply outlook for infill IOS is particularly compelling. According to Green Street, “The supply outlook for infill IOS seems to be one of the most attractive in all commercial real estate^.”[1] This attractiveness stems from a multitude of factors:

• Vacant land near most logistics hubs is virtually non-existent,
• Obtaining entitlements is even more challenging for IOS than traditional industrial spaces, and
• Annually, a segment of the IOS inventory gets converted into traditional industrial or some other higher-end use.

A notable trait of IOS is its counter-cyclical nature. Irrespective of economic cycles, trucks always require storage. However, supply restrictions, primarily due to the limited availability of land and zoning constraints, could pose challenges.

Where do you see the greatest opportunities in IOS? 

 The fragmented nature of the IOS sector offers several opportunities, especially in:

• Undermanaged assets. The majority of returns here arise from mark-to-market adjustments. Densification provides an additional upside, which isn't part of the base scenario.
• Aggregation holds a premium. It's one of the last remnants of alpha, primarily due to the small average transaction size.
• Specific markets also present potential growth arenas.

How do you navigate the challenges in IOS? 

Despite its promise, the IOS sector isn't devoid of challenges:

• Land Availability. Sourcing appropriate land for outdoor storage, particularly in densely populated regions where land commands a premium, is daunting.
• Zoning and Regulations. Establishing outdoor storage facilities isn't straightforward, given the myriad zoning regulations and environmental permits. Ensuring compliance is often a lengthy and expensive affair.
• Leverage to E-Commerce and Economic Growth. Green Street notes a concern, especially regarding tenant credit profiles. Many third-party logistics providers (3PLs) often have their revenue tied to specific industries or customers. Coupled with limited access to credit and short-term customer contracts, 3PLs are vulnerable, particularly when there's a slowdown in goods movement or consumption.

 What are your biggest concerns in the evolving IOS landscape?

Several factors induce unease in the IOS sector:

• Macro Risk: Fluctuations in interest rates and unforeseen events can significantly impact the industry.
• Irrational Entrants: Overzealous entrants who do not comprehend the intricacies of the sector have been a concern. This explains the hesitancy observed in scaling operations during 2020-2022.
• Local Regulations: These can pose unforeseen challenges, requiring constant vigilance and adaptability.

In summary, while the IOS sector is brimming with potential, like any industry, it presents its own set of challenges. Navigating this landscape requires a judicious mix of optimism, pragmatism, and adaptability.

 The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.

[1] https://greenstreet.com/insights/blog/industrial-outdoor-storage-a-beautiful-ugly-duckling#:~:text=The%20supply%20outlook%20for%20infill,IOS%20stock%20is%20developed%20into