A surge in investor demand for industrial outdoor storage (IOS) deals last year has calmed considerably in 2023 amid higher borrowing costs.
Transaction activity and purchase prices in the IOS sector have eased in 2023 with investors growing more selective regarding which properties they target in a higher interest rate environment, according to a new report from Marcus & Millichap, shared exclusively with Commercial Observer. With less financing options, many sponsors looking to grow their footprints in the IOS space are “solely” seeking locations with “substantial redevelopment potential” that are often near major population centers and other industrial activity, the report shows.
“Most deals are being completed with limited financing to mitigate downside, with underwriting hindered by the property type’s complex inputs,” wrote Al Pontius, senior vice president and national director of Marcus & Millichap’s office and industrial divisions in the report. “Some buyers are even undercutting rents to secure longer-term tenant leases, honing in on existing returns.”
Pontius noted that financial hurdles created by rising interest rates are “impeding” many investors from entering the IOS space as lone sponsors. Instead, several joint venture partnerships have recently been created to pool capital needed for creating new platforms. Individual deal sizes have been “generally small” with more than 90 percent of assets trading under $5 million per property, according to the report.
While outdoor storage has not been immune to headwinds facing commercial real estate of late, Pontius stressed that the IOS sector still boasts one of the lowest vacancy rates of any property type due to strong supply/demand fundamentals.
“As growing e-commerce underscores the need for this historically lesser-known segment of the industrial sector, IOS properties have emerged as some of the most prominent niche commercial real estate investments in the marketplace today,” Pontius said in a statement. “Because IOS supply is limited, a level of durability that is highly favorable for investors exists. And as IOS lots serve a mission-critical support role in last-mile distribution, the asset class has now come to the attention of investors on a broad scale.”