Stan Johnson Company

In today’s highly competitive marketplace, there’s a new subset of industrial real estate that is catching the eye of net lease investors. Industrial outdoor storage (IOS) properties, also referred to as industrial service facilities (ISF), can be distinguished from more traditional industrial assets in several ways: This subset typically has a much lower floor area ratio (FAR) in comparison to warehouse or manufacturing properties. FAR values for IOS/ISF facilities typically don’t exceed 20 percent. Users of IOS/ISF properties find value in the storage capabilities of the excess yard, which are often concrete paved or crushed rock surfaces. Typical uses for these facilities include equipment storage and maintenance, container yards, bulk material storage and distribution, fleet vehicle storage, trailer parking and drop lots. Properties that can accommodate these unique storage requirements are incredibly attractive to tenants in the fields of equipment rental, trucking, building materials, shipping container, chemical, auto/vehicle parking, energy and waste and environmental services, among others. IOS/ISF assets command higher rents per square foot of building area in comparison to their more traditional industrial counterparts. The additional value that tenants derive from the larger outdoor storage component helps drive this increase. For this reason, rents for IOS/ISF properties are oftentimes quoted in terms of rent per acre per month for ease of comparison in a market or submarket. Given the outdoor storage component, and oftentimes infill nature of these properties, there is a limited supply of this asset type which results in residual values being greater than traditional industrial properties. The renewal rate for tenants in this sector is also quite high, due in large part to the constrained supply of similar properties and higher-than-average replacement costs. Many of these facilities are primed for future alternative uses, but most landlords find that re-tenanting is simply not an issue. Supply is tight, and tenants in this property sector are benefiting from the e-commerce and construction booms that show no sign of slowing. This creates a “stickiness” that more traditional industrial facilities sometimes lack and helps keep tenants at their current locations. "Many of these facilities are primed for future alternative uses, but most landlords find that re-tenanting is simply not an issue." Key Characteristics of the IOS/ISF Sector Fragmented Market | Historically, IOS/ISF properties have been primarily owner occupied or owned by local or regional private investors, high net worth individuals and small private equity owners. There has been limited competition to-date from institutional investors on one-off acquisitions due to the smaller transaction size, but that is starting to change as more institutional capital is now flowing into the sector seeking diversification and yield from traditional industrial properties. Limited Supply | The asset subtype has seen very little new development in recent years. It is difficult in many areas to obtain proper zoning and entitlements for new construction. Many communities don’t encourage low density developments, and if zoning and permits are granted, municipalities may require developers to overbuild the site (e.g., fully concrete paved yards). Low Vacancy Rates | The IOS/ISF sector consistently reports a lower vacancy rate than the broader industrial market. Currently, market intelligence points to an average vacancy rate between 2.0 and 3.5 percent for the subset, compared to 5.0 to 6.0 percent vacancy across the entire industrial market. The limited availability in this space has led to rapidly increasing rental rates in recent years. "Given the outdoor storage component…there is a limited supply of this asset type which results in residual values being greater than traditional industrial properties." Predictable Expenses | Large expense exposure for landlords is very predictable for IOS/ISF assets. Roof, structure and yard maintenance costs are typically the only big-ticket expense improvements on net lease IOS/ISF properties. Some landlords have stated they are willing to take a risk on vacancy because the cost of re-tenanting is significantly lower than nearly all other asset classes, including traditional warehouse buildings. Shorter Lease Terms | It is common to see initial lease terms for IOS/ISF properties in the 5- to 7-year range, which is often shorter compared to traditional warehouse space. A potential cause is the historical lack of institutional landlords in the sector pushing for longer term leases. Additionally, because many tenants in the IOS/ISF sector are long-term occupants, it is not uncommon to find tenants operating in their lease option periods rather than their initial lease term. Local & Regional Tenants | The majority of users of IOS/ISF properties are local and regional companies with smaller credit profiles. However, there are a number of tenants that operate hundreds of locations nationwide and report incredibly strong financials. Some of these household names include ABC Supply Co., Airgas, Beacon Roofing, Carvana, Herc Rentals, SRS Distribution, Sunbelt Rentals, United Rentals, WillScot and XPO Logistics, among many others.

As the COVID-19 pandemic starts to wane in the U.S., the commercial real estate market has been closely monitoring the status of the most heavily impacted segments to determine if the time is right to start deploying capital in new acquisitions – and no product type is being watched more closely than the office sector, as work from home became dominant for the last year. Some investors have been hesitant to pursue new acquisitions, even with incredibly cheap financing available, for fear of what the future of office looks like. After a recordsetting year in 2019, where the single-tenant office sector reported annual sales of $28.7 billion, the market saw transactions plummet in 2020 with sales volume only reaching $18.7 billion. That drop is almost solely a byproduct of the uncertainty that has confounded the marketplace. With the pandemic’s end on the horizon, investors are now keenly focused on seeing if the time is right to return in earnest while interest rates remain very low, and pricing in other commercial real estate segments remain very aggressive. With that being said, here are some of the dynamics that investors are most closely following:   What are companies that have sizable office presences throughout the U.S. doing? Office investors are looking to some of the nation’s largest companies and thought leaders to see how they are approaching the question of returning to the office. Investors have a good degree of faith that the voices of the industry titans represent a good barometer of what other smaller corporate leaders throughout the U.S. are thinking. Just this month, both Goldman Sachs and JPMorgan Chase announced their intent to return to the office. Chase has set a goal of 50 percent of its workers returning to the office on a rotating basis by June, with CEO Jamie Dimon saying: “We want people back to work, and my view is that sometime in September, October it will look just like it did before.” Meanwhile, Goldman Sachs recently announced a goal of having workers back to the office by June 14. What do employees want? Office landlords understand that while executives ultimately make real estate decisions and sign leases, their decisions are very much impacted by how their rank-and-file employees want to work. Particularly in times of low unemployment, companies must be responsive to their employees to recruit and retain them. In March 2021, Eden Workplace, a workplace software company, released a poll showing that 85 percent of workers want to return to the office in some capacity, with the majority of those respondents (52 percent) saying that social interaction with colleagues was the primary reason. This would seemingly bode well for office owners, insomuch as it shows that offices are still a core part of the American social fabric. How much impact has there been on the office market, and how will it play out in 2021? Kastle Systems, an electronic access company, recently reported that office occupancy (not percent leased, but rather percent physically occupied) still has only risen to 26.5 percent of where it was before the pandemic. This will be a telling statistic to monitor for landlords, to see how fast this rises in the months ahead. Additionally, investors will closely be watching the amount of sublease space that stays on the market, which is at an all-time high. Although there are reasons to be optimistic about an office recovery, there are a great many headwinds still blowing that will require discerning analysis from investors in the months ahead.  

  Summary of future growth plans for each tenant Average cap rate and sale price information for frequently traded retailers Credit rating summary Average square footage ranges and store counts for each tenant