Industrial Outdoor Storage Should Avoid the 'Freight Recession'

Because of its diverse tenant base, the industrial outdoor storage is not suffering much during the current “freight recession,” according to Jimmy Ulrich of Colliers’ Industrial Capital markets team.

The trucking industry, which is closely linked to IOS, as of March 2023, has seen orders drop by approximately 38% compared to the same period the previous year.

J.B. Hunt Transport Services’ president Shelley Simpson went as far as to describe the situation as a “freight recession.”

Ullrich said this impact “won’t be as harsh as many anticipate” due to its tenant base, putting it “well-insulated” from any resulting major negative impacts, especially given that there is extremely limited supply and increasing demand.

“[IOS] will likely continue to attract investor attention and deliver impressive returns due to its diverse and counter-cyclical demand profile,” Ullrich said.

The counter-cyclical action can be seen in modular building companies such as Williams Scotsman, according to Ullrich, as demand for that company’s storage capabilities increases during a recession as buildings are shipped back from their locations.

Another is Beacon, a roofing supply house that has a relatively stable demand profile over time, “with their space needs tied to the existing supply of roofs rather than new construction,” Ullrich explained.

IOS’ tenant base includes a wide range of companies, Ullrich says, including equipment rental, plumbing supply, lumber yards, pipe yards, infrastructure supply, contractor yards, automotive storage, auction sites, and more.

Indeed, many experts contacted by GlobeSt.com are bullish about this industrial niche.

Reid Hanner, Partner with Foundry Commercial, who specializes in industrial brokerage, and in particular, IOS/ISF deals, tells GlobeSt.com that he sees IOS demand continuing even as port volumes slow.

“The tenant pool remains deep, drawing users from multiple industries including construction materials, pipe supply, heavy equipment, concrete precast, auto, and landscaping, in addition to traditional trucking companies,” Hanner said. “The broad tenant mix has kept velocity high across all our markets, and we see this trend continuing.”

Supply is favorable as well to investors, Doug Ressler Manager of Business Intelligence Yardi Matrix, tells GlobeSt.com. New development within the IOS sector will remain constrained due to stringent zoning regulations within such infill locations, as well as a broader focus by developers on larger-scale industrial assets.

“What’s there provide infill assets in high barrier-to-entry, urban growth markets,” he said. “Usually sited near the confluences of several area freeways and the train and truck intermodal facilities.”

Also, the low cost of capital expenditure needed to monetize land assets for IOS makes the niche sub-segment very attractive to investors, Peter Kroner, Director, Industrial/Supply Chain & Logistics Avant Team at Avison Young, tells GlobeSt.com.

“Coupled with the highly decentralized ownership in the current landscape, it allows interested investors to actively search for assets that fit key features needed by industrial users without bidding wars from sophisticated platforms.

“Due to the lack of centralized ownership and opaque market pricing per trailer spot, industrial users are willing to pay premiums for ease of ability to satisfy the scalable need from owners that can offer well located, secure, clearly priced options.”

He said the IOS sub-segment is largely tied to the strength of demand by industrial CRE users, and as such has exceeded peer group rent growth performance in the COVID era.

“With current drops in port activity across the country for many reasons, we’ve seen demand for IOS, and thus rents drop to start 2023,” Kroner said.

“This should be taken in historical context, however, as 2021 and 2022 were two of the most active years for supply chain networks recorded in history.”

Supply chain issues, inventory drawdowns and subsequent bull-whip build-ups, and extreme consumer demand led to the market struggling to find equilibrium for +2 years and 2023 “appears to be guiding more toward a return to normal market conditions where activity is still robust, but tapering down from historical compounding growth.”