iOS – The Real Estate System Upgrade
The compelling opportunity in Industrial Outdoor Storage
As housing markets struggle with affordability challenges and entitled land becomes increasingly scarce, the untapped potential of Industrial Outdoor Storage (IOS) offers a striking contrast. Much attention has been given to the decline in vertical construction costs (materials like timber, cladding, and windows) as supply chains normalise post-COVID. Similarly, the drop in housing starts following the 2022 spike in mortgage rates has been widely reported. However, land scarcity [in the USA] remains the core issue preventing vertical construction in any sector, with John Burns, CEO of John Burns Real Estate Consulting, noting in Bloomberg: “The biggest shortage in the country is the entitled land we build on.” As is attributed to Mark Twain, “buy land, they’re not making it any more”. Land is a fixed commodity, ingenuity isn’t. Investors are waking up to the opportunities in this much misunderstood sector.
It would be an exaggeration to suggest IOS is an upgrade to conventional Industrials, however according to Manulife Investment Management, IOS has become almost a proxy for the Industrial sector. Because the IOS market is still considered somewhat ‘alternative’, its market data history is relatively limited. “Fundamentally, however, the demand and supply-side drivers of IOS are aligned with, or tangential to, those of the industrial market. Many of the same economic and demographic factors we consider from a market research perspective when analyzing industrial market trends are applicable to IOS (e.g., household formation, consumer spending, etc).”
Investment in Industrial Outdoor Storage (IOS) in Europe is projected to grow by 4.5% annually over the next five years, according to research by Savills. The IOS market varies by location and is shaped by factors such as local regulations, connectivity, and economic conditions. Despite this variability, significant untapped potential exists. For example, Savills’ analysis of UK Land Class 23 data and land registry records identified up to 510m sq m of land suitable for IOS use. Savills highlights IOS as a compelling investment opportunity, driven by rising demand for storage space amid limited supply. The sector has shown exceptional rental growth, with UK rents up by 47% in 2023 compared to 2022.
According to the 2024 2Q PwC Investor Survey, the overall IOS universe is a $200 billion market, with over $2 billion in institutional capital raised in the past year. This growth highlights the sector’s increasing attractiveness to investors seeking high returns in a competitive industrial market.
While there is no strict definition for IOS properties, they benefit from two key factors: simplicity and scarcity. Its simplicity makes IOS properties straightforward to manage, while their scarcity, compounded by restrictive zoning/planning laws, creates a sense of urgency for investors: act now or miss the opportunity. This lack of a standard definition contributes to the nebulous nature of IOS. The term encompasses a wide range of properties, from truck yards and maintenance shops to storage lots for shipping containers and vacant land near ports. Key characteristics of IOS properties include low building coverage (<20%), proximity to transportation infrastructure, and planning that allows diverse outdoor storage uses. These factors make IOS assets essential for logistics users like 3PLs, who prioritise reducing transport costs, which often comprise up to 55% of total supply chain expenses.
While the absence of a standard definition for IOS adds to its mystique, research highlights e-commerce as the primary driver of IOS demand. Subcategories such as cold storage, truck terminals, and IOS have become essential components of supply chain efficiency, enabling the sector to meet the ever-growing demands of e-commerce. IOS also plays a critical role in providing alternative storage options and facilitating deliveries through strategic transfer points.
Recommended by LinkedIn
According to Green Street, in-fill sites near logistics nodes are particularly attractive due to tight supply and planning constraints, ensuring robust demand and rental growth over time, and the nascent European IOS market is beginning to attract interest. There have been numerous entrants, and Centerbridge’s interest in the sector, with Modal Property in the UK and M7 in Europe illustrate the expansive opportunities across geographies too. As the sector matures, the scarcity of entitled land and increasing demand are expected to fuel further growth.
Institutional investors are increasingly allocating funds to IOS because it offers relatively low capital outlay with outsized returns. Early aggregators who acquired properties on a smaller scale have since recapitalised portfolios with institutional backing, further driving sophistication in the sector. Andrew Wiesemann, Associate Vice President at Matthews Real Estate Investment Services, predicts that IOS will become an institutional-grade asset class within five to ten years.
Investors are drawn to stabilised properties with creditworthy tenants and limited site coverage, typically no more than 25%. The focus is on irreplaceable assets in metropolitan locations with restrictive planning, ensuring immediate and long-term value.
As traditional asset classes like multifamily and retail lose momentum, institutional capital is flowing into IOS, with billions already raised by leading funds.
According to Green Street, the fragmented ownership of IOS creates significant opportunities for consolidation. Over half of IOS sites are owned by non-institutional players, meaning acquisitions often yield rent and NOI upside when transitioning to institutional management. Green Street also opine that IOS properties offer superior risk-adjusted returns compared to traditional industrial real estate.
With institutional investors pouring capital into Industrial Outdoor Storage (IOS), the strong financing market is reinforcing its growth, evidenced by high-profile deals in both the U.S. and UK.
Fortress Investment Group recently completed two IOS refinancing deals totalling $708m, including a $493m single-asset, single-borrower (SASB) CMBS loan and a $215m balance sheet loan. Deutsche Bank led the financing, completed in June 2024. The SASB CMBS loan is secured against a portfolio of 41 West Coast IOS properties spanning 1.9m sq ft of building space across 142 acres. Seventy-five per cent of the properties are within one mile of a highway, and all are within 25 miles of a port. Appraised at $740m, the portfolio features 31% site coverage and rental premia for additional yard space.
The latest European commercial mortgage-backed securities (CMBS) transaction has achieved the tightest pricing of the year, and 13% was IOS properties. The most senior AAA-rated notes in the UK Logistics 2024-2 DAC CMBS, sponsored by Blackstone, were priced at 135 basis points, a significant improvement over the pricing of the same notes in Blackstone’s previous European logistics CMBS, Thunder Logistics 2024-1 CMBS, which priced at 150 basis points in October. Investor demand for the UK Logistics 2024-2 DAC CMBS was strong, with the order book being 2.4 times oversubscribed. The CMBS securitises two loans, Mileway and Indurent, provided by Bank of America and Morgan Stanley. These loans are secured against 4m sq ft of logistics properties and 3m sq ft of IOS space in the South East. Indurent, Blackstone’s industrial platform launched following the merger of St. Modwen Logistics and Industrials REIT, forms part of the securitised portfolio.
Much like Apple’s iOS transformed personal tech, Industrial Outdoor Storage (IOS) is reshaping how we think about logistics, supply chains, and investment opportunities. With simplicity, scarcity, and strategic location at its core, IOS is proving to be the next big update in commercial property portfolios.