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Spencer Levy
It may not be the most glamorous asset type we've spotlighted on the show, but Industrial Outdoor Storage or IOS is workhorse real estate and a critical cog in the global supply chain. Not familiar with IOS? Well, on this episode we'll define what it is and we'll follow the money. We'll tell you how and why the simplicity of industrial outdoor storage is emerging as a hot property for investors.
Brian Fiumara
You see a lot of the fund level family offices moving in saying man, this is an irreplaceable location. This is a great asset. This has great future growth to it. That's why you see such a diverse group of investors in this IOS space
Spencer Levy
That's Brian Fiumara, Vice Chair with the CBRE Institutional Properties Team based in New Jersey. Brian has over 25 years in the business and has been involved in industrial deals worth more than $25 billion.
Myles Harnden
The scarcity that we get in this property type is very real, and that scarcity creates a high value, it creates a lot of demand, and it just creates a hot asset class.
Spencer Levy
And that's Myles Harnden, a CBRE Vice President based in Minneapolis, where he covers Industrial and Logistics, including industrial outdoor storage. Myles joined CBRE last year and is currently marking his 20th year in commercial real estate. And to deliver the perspective of an active investor in this space, we welcome Nick Firth, the CIO of Industrial Outdoor Ventures.
Nick Firth
It is a big market, but it's highly fragmented.
Spencer Levy
IOV is a Chicago-based firm that was the first national real estate investor to specialize exclusively in outdoor storage. Nick has 25 years of international real estate experience, including more than two decades in the industrial sector. Coming up, a round table with the keys to an asset type that touches industrial, construction, energy, indeed just about every sector of commercial real estate, industrial outdoor storage. I'm Spencer Levy and that's right now on The Weekly Take.
Spencer Levy
Welcome to The Weekly Take, and this week we are talking about one of the hottest subsectors in the industrial real estate category. We've got three terrific guests, starting with Nick Firth, CIO of Industrial Outdoor Ventures. Nick, thanks for coming out.
Nick Firth
Thanks for having me, Spencer.
Spencer Levy
Thanks for coming. Then we have Brian Fuimara, Vice Chair at CBRE. Brian, thanks for coming out.
Brian Fiumara
Appreciate it, Spence. Thank you.
Spencer Levy
You bet. And then, Myles Harnden, Vice President, CBRE. Myles, thanks.
Myles Harnden
Thanks, Spencer. Glad to be here.
Spencer Levy
Great to have you. So, Nick, let's just start with you. Industrial Outdoor Storage, often going by IOS. We love acronyms in this space. What is Industrial Outdoor Storage?
Nick Firth
Yeah, quite simply it is single tenant industrial with an FAR of 0.25 or less. A traditional warehouse would be 0.4 coverage or 40% coverage where 25% or less and typically what we buy is 10-12% covered sites.
Spencer Levy
Just for purposes of our audience, FAR is the buildable square footage on the site. Is that correct, Nick?
Nick Firth
Yeah, floor area ratio, yeah.
Spencer Levy
Terrific, thank you. And, so, Brian and Myles, Nick just described the space. Describe it a little bit further. Talk about parking, trucks, all that sort of thing. So, Brian, why don't we start with you.
Brian Fiumara
Basically, it's truck terminal, outside parking, outside storage, laydown yards, anything that's a non-traditional inside the warehouse building. Everyone drives up and down the turnpikes or their major arteries and sees these large 40 foot clear warehouse spaces. That's more of your traditional warehouse use. These spaces have a little bit different of a niche in the marketplace. More infill locations, more port, more right-off highways, more service industries, more so than your bulk distribution warehouses.
Spencer Levy
But they do also distribute goods from these, but they're not considered to be big box warehouse distribution.
Brian Fiumara
Correct. It's a niche, right? You can have any type of product in a smaller building on a smaller covered site. If you look at a 10 to 15,000 square foot building on a 10-15 acre site, right, you can have anything in that building. A lot of it is outside storage, outside parking, auto parking, trailer parking, things of that nature.
Spencer Levy
By the way, just a definition of the term lay down, does that just mean outdoor goods, stored outdoors? Myles, anything to add to the description of the sector?
Myles Harnden
I would just like to add that the main function of the IOS site or the money maker, quote unquote, is the outdoor storage. The primary function of it is the outdoor area. Sure, there's a building on it, but the value and the money making aspect of that property is the outdoor area, the stuff that's not covered by a roof, which is vastly different than your typical warehouse distribution, industrial manufacturing that we’re used to.
Spencer Levy
So Nick, let's break down the math. How do people pay rent on industrial outdoor storage when you compare the indoor portion to the outdoor portion?
Nick Firth
It's all market by market, but what you'll often see is a price per land square foot or a price per acre. Sometimes you'll see that quoted on a price-per-building square foot. If the building makes up 15-20% say of the side, often it's a blend of the two. And then if you take it to truck terminals those metrics are a price per door per month.
Spencer Levy
Got it. So, it's either played on a traditional real estate basis, which would be price per square foot, or it's price per square foot plus spots that you're taking for the trucks.
Nick Firth
And what you'll see is sometimes eye-popping rents. When you think about a traditional warehouse building, the rent might be $15 a square foot. In our space, it's often common to see $25, $30 a square foot rents on just the building, because again, the building is a very small piece. The yard, which they're paying rent on, get blended into the building.
Spencer Levy
Let's continue the math here. So, we've got the components, which are the building. We've got the parking spots. What about additional items such as water, electricity, other things that might be charged to the tenant?
Nick Firth
Yes, so a traditional IOS lease looks very similar to a warehouse lease. So, for the most part, it's triple net, the landlord's responsible for structure, the tenants are basically responsible for everything else.
Spencer Levy
Brian, let's talk about the capital markets. We talked in the pre-call that the capital markets for this are very, very attractive, in part because of supply and demand. And, in fact, of supply it's hard to make more of this, even though it sounds like it's a piece of raw farmland, you gotta get lots of local approvals and they're hard to come by. So, let's first talk supply and demand, then we'll talk capital. How hard is it to build one of these facilities?
Brian Fiumara
Well, I think the IOS space has run into the same kind of headwinds that the industrial space has in general, the not in my backyard type of philosophy for new development, right. If you have a green field or regular land, a lot of times the last thing that those municipalities want are truck terminals, lay down yards and those types of things. So, as the supply, right, continues to dwindle and you're not able to put new stock into use just due to some regulatory pushback. Some environmental pushback, obviously it's gonna help increase the valuation and make those existing sites way more scarce and way more expensive at the end of the day.
Spencer Levy
So, Myles, where does IOS fit with the broader industrial real estate ecosystem?
Myles Harnden
Well, industrial outdoor storage certainly is closely related to or tied to the broader industrial real estate market. Every time a new Big Bomber million square footer is built, that building needs to be served by trucks, tractor trailer trucks and semis. The more Big Bombers manufacturing warehouse facilities or industrial facilities we create, that brings on more trucks. With more trucks, you need more tires. With more trucks, you need more parking. You need more fleet maintenance facilities, you know? So, IOS, in a lot of circumstances, services the larger industrial market. Furthermore, you mentioned earlier about why is it different from farmland. Trucks serve these sites. If you're a construction lay-down yard, if you're a supply company, if you're an equipment rental company, trucks are bringing your equipment or your supply to that facility and to the population. So, location is very critical. We typically want to be around other industrial areas so we can serve the population and serve the other industrial properties. So, it's very closely related to the overall general industrial market.
Spencer Levy
Let me dig a little bit deeper here. Let's assume you're a truck that has goods that you're picking up at the Port of Charleston and you're shipping them across the country. You could stop at a warehouse 500 miles away and drop it off and have a smaller truck take it to the local market, but where would this IOS fit within that logistics chain? Is it the second stop? Is it to stop after they drop off the goods? Just a little bit more detail because I'd like our audience to understand it.
Myles Harnden
It could be before or after. A lot of these trucks need a place to sleep overnight. If it's a pure truck terminal or truck parking lot, they could start the day or end the day at an IOS facility, which would typically be in an infill area near the population. If it is a service facility, obviously it's going to be before or after a lot of the iOS space or crosstalk truck terminals, fleet maintenance terminals and the like. So, its – IOS is there every step of the way.
Nick Firth
So, Spencer, maybe I can jump in and break IOS down into the four different property types and that'll help explain your question. So, you have trailer container yards. So, if you brought your goods into the part of Charleston, in your example, those goods may or may not be ready to go to the warehouse. So, you could see those containers unload from the ship, go to a container yard and sit there. Also, if your example is that they're trucking it across the country, there's restrictions as to how long a driver can drive. They have to pull over, they're not allowed to pull over at the side of the street. And, so, they can go to trailer yards where they can park, rest, and then continue their journey. So, that's one piece of the IOS universe. The next, which I think is the most widely recognized, are the cross-dock truck terminals. So, this is generally either breaking down bulk or consolidating bulk. So, if your containers have come in, they need to be broken down because it's a container of one product type. They break them down at the cross dock truck terminal and then those trucks can take their routes to either a warehouse or the end users. The next would be an equipment maintenance facility. So, obviously, those trucks need to be maintained somewhere, and that's what that does. And, then, as Myles was kinda hitting on, once they've gone to a warehouse, they may go to a smaller contractor's yard, which would be the low-covered warehouse, which is the fourth property type within the IOS universe.
Spencer Levy
Got it, but it's all related to either the shipping of goods, the maintenance of the vehicles themselves, or something that is maintenance of the drivers themselves, making sure that they're healthy and they're rested.
Nick Firth
That certainly makes up 60, 70% of the universe, but you do have other uses. So, utility contractors, you've got to maintain the utility grid within the U.S., gas, electricity, etcetera. So, those products need to be stored somewhere. Think of the big vinyl coated copper reels that are 12 feet tall. They need to start somewhere before they go to the field and get utilized. In the oil and gas industry, you have parts for the oil rigs. You'll see a lot of that down in Houston, big lay down yards with pipe and things like that. So, that is also another use that fits into the IOS world. It's not just transportation.
Spencer Levy
But there's also a use that might be construction equipment. Caterpillar, they've got a bunch of equipment that they've gotta have relatively close to where the construction is happening. So, there's a lot of different uses for this beyond simply logistics, maintenance. It's storage of stuff that can be stored outdoors more effectively than being stored indoors. Fair way to put it, Brian?
Brian Fiumara
Yeah, I agree one hundred percent and if you're up and down the turnpike, you're always seeing bulk materials, lay down yards, equipment, electrical vehicles, electrical equipment outside. So, yeah, I agree one hundred percent.
Spencer Levy
So, now let me also just take a vision out of our listener's head. This is not a convenience store truck stop that you might see on the side of the road. It is not amenitized like that. It is a traditional industrial facility with traditional parking for those additional amenities. This is not that.
Nick Firth
Correct.
Spencer Levy
Now, let's really get to, to the bottom line here. Myles, maybe go in a little bit on how this space is performing today and maybe it's some commentary on the capital markets.
Myles Harnden
Yeah, I'll leave the capital market stuff up to Brian, but the, uh, overall in our market, for example, I'm in the Minneapolis, St. Paul area – the Twin Cities. Uh, we have a pretty low vacancy rate of three and a half percent, uh, metro wide. If I tried to correlate that to IOS, we'd probably be between one and two percent somewhere. The property type is super scarce. I think Brian hit on the not in my backyard aspect. Municipalities typically don't like small buildings on large acreage piece that hurts the tax base. Typically, these properties bring a very blue collar workforce and they're just not easily permitted or cities aren't, you know, putting in tons of dollars into trying to attract these types of businesses. So, the scarcity that we get in this property type is very real and that scarcity creates a high value. It creates a lot of demand. It just creates a hot asset class. We have a trucking recession at the moment and they're probably a quarter to 33% of this market and they are not really in expansion mode at all. And even with that, we are still seeing a very tight market, good returns and a lot of activity. We have had some slowdowns with the tariffs, if you will, and some uncertainty in the market, which greatly affects this space, past couple of quarters, but recently we've started to see an uptick there. There's lots of reasons why IOS is performing well today.
Spencer Levy
So, Brian, walk through the capital markets environment, pricing here, and who are some of the players?
Brian Fiumara
Every deal is different, right? And Nick and I could go back and forth on the cap rates spread between your ambient warehouse space and IOS facilities, depending on market, tenant, location, quality, but you can say on a whole, right, you find IOS deals trading, let's say six to six and a half cap, maybe a seven cap versus some of your traditional warehouse spacing, which is let's say between a five and a five, seven, five cap for best of best product. I can tell you that, that Delta is gonna – I think it's going to start shrinking over the next few years. As you've seen, lenders become more comfortable with the space. And as you see more, it become institutionalized, right. No different than the industrial business, right. That 15, 20 years ago was not the darling of the institutional world. Multi-family was, right, industrial started following that. And once that cheaper cost of capital comes into the program, right obviously pricing starts becoming different. And the mindset becomes different and then it becomes institutionalized. So, you'll probably start to see some of that gap in spread between ambient warehouse space and IOS start to shrink as you continue to see the Blackstones, the JP Morgan's, all the big, big equity shops become more in both on the debt side and on the equity side on these IOS facilities.
Nick Firth
Yeah, on an individual basis, I think you're right, Brian. One of the barriers to entry for the institutions is the average deal size of an IOS is about $10 million. It doesn't get the institutions excited. But if you can put together a well-curated portfolio in markets that the institutions want to be in, I think, you see those cap rates spreads really narrow and I'd price it more 50 to 75 basis points wide of where a Class A asset would trade.
Brian Fiumara
The aggregation strategy is important. I think one of the bigger deals we saw right when Altera did their deal with Peakstone, I think it was like north of 50 properties, uh, you know, plus or minus $500 million deal in 14 states, right. So, you saw that aggregation strategy that Altera's had for years, picking off three to $10 million deals. You've got to see the backend of that strategy.
Spencer Levy
This reminds me quite a bit of self-storage, what it went through over the last, I would say, 15 years where–you say, the average deal size is $10 million, some of those self- storage deals are a lot smaller than that. And the only way it makes sense for these big institutions is to aggregate. But, when you're dealing with a cap rate delta between this and in traditional industrial, you're dealing with tighter leasing conditions. Uh, you could see why aggregation is worth the time, effort, energy to do it or to buy people who have already aggregated.
Nick Firth
Yep, that's right. And to put this in perspective, I mean, if you look at the top 48 markets across the US and we subscribe to some CB data for this: CB estimates that's north of 75,000 assets with a total capitalization of $300 billion. So, it is a big market, but it's highly fragmented.
Spencer Levy
And by the way, $300 billion is one third the size of the big tech firms. But, nevertheless, $3 billion is not insignificant given the fact that I suspect that much like self storage, the institutional ownership in this segment is less than 10%. Is that a fair statement?
Nick Firth
That is correct, Spencer.
Spencer Levy
And that's exactly what it is for single family rental. Single family rental institutional ownership, I think it's less than 5%. And self storage is probably now creeped up to that 20% level, if you include institutional grade and others. But, nevertheless, it's still a relatively small percentage which gives this aggregation strategy a lot of credence.
Nick Firth
Yeah, with very little new supply. Myles hit on the vacancy in the Twin Cities. Nationally, we're tracking the vacancy rate in the top 48 markets at 2.54%. That's up 40 basis points year over year with annualized rent growth of 2.8% versus negative for warehouse and all industrial. And if you look at the five-year average rent growth in this space, it's north of 8.8%, leads all industrial. Again, there's good demand with very little new supply. And we've talked about it, this is the poster child for NIMBYism. It doesn't create a lot of jobs. It doesn' create a lotta real estate taxes. It creates congestion and taxes the highways.
Spencer Levy
But we need it, but it's necessary. It's one of those things that may not be pretty, but because of its necessity, the existing facilities aren't going away. And, maybe, there is some new supply on the horizon, but it's for the reasons you just laid out, it's gonna be a tough uphill climb.
Brian Fiumara
Spence, I think the interesting part, right, is as we focus on both the, obviously the industrial sector and where we see some declining rents, some face rates declining nationally and some softness in that leasing market. I know where I sit up in the New York, New Jersey marketplace, we've seen rents increased pretty dramatically over the past two years. There was a peak, I feel like, and Nick, correct me if I'm wrong here, but I feel there was a peak in ‘22-ish in IOS rents. On a per acre per month basis in the port area of New Jersey and New York. And I feel like there was a retraction in some of those rents because it got as high as 45, 50,000 per acre, per month, where I feel like it retracted down into the twenties. And, now, I feel it's back. We've seen deals being done in the 30 to 35,000 per acre for a month range. So, where the industrial space we're seeing softness in the market on face rents, the IOS side had growth during the most recent kind of lull in the industrial sector.
Spencer Levy
In terms of the actual estate itself. Since these are triple net, since they're mostly trucks on these, you probably don't need the same level of electrical, water that you might need in a manufacturing site. Furthermore, I think a lot of people listening are like, geez, are there data centers, could you repurpose some of these? But this is really land and that is not for that purpose, doesn't really stub to the utilities in that way. Is that a fair way to put it?
Nick Firth
I'd say on a water perspective, yes, if you're thinking about data centers needing a lot of water, these don't need a lot of water. But from power, you're not going to need the same amount of power as a data center. But as we get more electrification in the truck industry, you definitely will see a need for more power. Some of these facilities will have some sort of light manufacturing going on inside them, which will require power, but definitely not to the same scale as a datacenter.
Spencer Levy
Let's go there to the electrification of the industry and as we're changing here before we even get into self-driving trucks, electric trucks I think are already here. The question is how much are they going to scale up? So, at these facilities as we scale up electric, are you in the process now of having some of these facilities install chargers?
Myles Harnden
We have chargers in our market just because diesel engines in the winter up here in Minnesota need to be plugged in so they can start in the morning. I understand that's not true in other markets like Texas etcetera but there's been some circumstances where we've been trying to build out some truck parking lots and we've gotten some kickback from municipalities because we're asking for these big lots with these chargers around the side but if we slant the story that this might be a future electronic vehicle, electronic truck charging station, it's surprising how the entitlement process is much easier for us. So, we're starting to see people thinking that way and starting to look at that, but it's certainly gonna be interesting in the next 10 years to see where that goes.
Spencer Levy
But, certainly, when you're speaking about the entitlement process, it brings up other things of what will expedite that, and solar panels. You seeing anything like that in this industry?
Nick Firth
Few and far between, again, the buildings here are much smaller, so you don't have a lot of scale. You do see it in some of the Phoenix markets and some of the West Coast markets.
Spencer Levy
Let me dig into one issue, Myles, and Brian or Nick, you can jump in here. Given the fact you have trucks on there, you obviously have oil, you have gas, you have spillage all over the place, probably not all over to place at your facilities, Nick, I might add, but nevertheless, it does happen and it causes environmental issues. You need phase one, phase two. So, the transfer of title of this is not as simple as it would be for a green field. Nick, how do you handle the environmental side of this?
Nick Firth
Yeah, so we'll carry out traditional phase one and if needed, phase two. If there's been a small spill, fuel spill, something like that, that's relatively easy to clean up. But the bigger environmental challenges we stay away from. If we can't quantify the cleanup in terms of the time to clean it and the cost, it's not a risk that we expose our investors to.
Spencer Levy
And that would be something like an underground storage tank.
Nick Firth
It could be an underground storage tank that is leaked. A lot of these uses tend to occupy sites next to one another. Some of them are heavier uses, so you can have conditions on your soil that were created a long time ago from an adjacent use.
Spencer Levy
Got it.
Brian Fiumara
Hey, Nick. You know, PFAS has become the red herring out there in the environmental world. Have you guys run into that or has it changed your appetite for acquisition if you see PFAS on the site, knowing that the cleanup regs are still kind of in their infancy stages?
Spencer Levy
And Brian, what does that term mean?
Brian Fiumara
PFAS is a contaminant that has become more prevalent, I would say, and environmental protection agencies have really started to focus in on it on certain levels. And there's not a really a clear kind of cleanup parameters, I would say again in different markets. So, I was – cause so we've seen certain deals in both the IOS and in the industrial space kind of get sideways on environmental if a phase one shows PFAS or potential for PFAS, I was curious if it's changed Nick's outlook. Cause a lot of the sites that you're looking at – you know, if you're in Newark or if you're into some of these other markets, I mean, you're next to superfund sites, you're on contaminated sites, there's no clean site in New Jersey, right. So, I'm just curious, has he seen a change, the entire industry, not just his firm, but has he seen more of his peers back away from opportunities like that?
Nick Firth
Yeah, I mean, I'd say that generally speaking, if, if we can't get a lender comfortable to lend and it won't act as collateral, then we're not going to buy this at a very high level. And I think there's groups out there that will buy contaminated sites, clean them up and you'll see them then sell them on and that's a totally different industry. Again, we're now taking environmental risks.
Spencer Levy
In terms of the investor universe that's listening to this show, maybe I'll go to you, Brian. Tell me how the institutional ownership of this sector has increased over the last decade.
Brian Fiumara
A decade ago, the players in the game, you know, real term, the JP Morgan's were more of the players in the IOS space. And I think a lot of it was more truck terminal back in those days also, which is – you can call part of the IOS face because of different use. Um, I think as time has changed and it's more of the lay down yard. Those groups have gotten accustomed to what it is in certain locations, right. Most of the operators and buyers have an institutional backing to them. There's groups that have Blackstone behind them, Carlisle behind them. LaSalle behind them some of the larger institutions that have set aside funds specifically for this, as Nick used to do back in his prior career before his new job. So, I think you've seen the institutions, but on fund level, you see it. And you see people like everything, Spencer. I mean, people are chasing yield, right. So, when you have an opportunity to not have to compete sometimes against some of the larger institutions for yield in an industrial type of use, where maybe it's a 10 to 12 million dollar deal, where you won't typically run into the JP Morgan's and the Blackstone's on a smaller level, that's where you see a lot of the fund level family offices moving in saying, man, this is an irreplaceable location. This is a great asset. This has great future growth to it. That's why you see such a diverse group of investors in this iOS space.
Spencer Levy
Are most of these national contracts, or are they mostly local contracts? Nick or Myles?
Nick Firth
Yeah, if we look across our portfolio, Spencer, of about 90 assets in 18 states, about 85% of those tenants are regional or better credit and only 15% would be local credit. And what you often find is the smaller players tend to like to own and the bigger players like to lease.
Spencer Levy
What percentage would you say is user-owned versus investor-owned?
Myles Harnden
In our market, I mean, I know everything's market specific, but in the Twin Cities market, I would say maybe only 10 to 20% is actually investor or institutional owned. In the ‘21, ‘22 era, we saw a lot of institutions and different fund groups being able to outprice users. The cost of capital was basically zero and institutional investors were outpricing users. So, it was an odd time. We've seen that switch back to users being able to out price the same property today, just with where the cost of capital has gone. So, Nick's exactly right, especially in certain markets, a outdoor storage user traditionally has been a local or regional group that's going to own it. But there's still those national groups looking for strategic locations and infill areas that are very good tenants.
Spencer Levy
It sounds like a screaming sale leaseback opportunity across the country if you go to these large occupier users and say well we love you you got a great location here's a 20-year lease here's ten million dollars I think a lot of them are gonna take that. So, are we seeing a lot of that kind of corporate finance sale leaseback activity, Brian?
Brian Fiumara
We definitely see a lot of that. And we also see a lot of the supply coming from just excess corporate real estate, right. If you're in Newark, right, where a lot of the oil companies have owned some of the space in that marketplace, that's heavy industrial already, right. So, the zoning complies with what you want to do there long-term, typically. You'll see a lot of the sites that were former tank farms, former other things get converted into IOS space, because again, the lots aren't typically big enough to make sense to build an industrial warehouse building, right. So, you have more coverage on three to five acres. And depending on the site, the pricing is very attractive in the marketplace where the institutional side, that's not there for them.
Spencer Levy
It kind of reminds me of not just self-storage, it reminds me actually to some degree of affordable housing. And the reason why is that a lot of institutions didn't go into that segment in part because it was operationally inefficient. Now, with data getting better, it can become operationally more efficient, which can institutionalize it. I'd love your perspective on that, Myles.
Myles Harnden
Traditionally, this space has been very mom and pop owned. It's been typically blue collar operators. Of course, we have huge multi-billion dollar national groups in this space, but there has not been very sophisticated ownership in these properties. On top of that, the big brokerage houses haven't had their research departments tracking the data that they do on other industrial projects or different asset types. And, so, what we've had is kind of the Wild West as far as how this has gone. A lot of these institutional investors now are also getting smarter. They've taken their licks over the years getting into this space, having environmental and zoning challenges that they're fine tuning and learning how to approach now. And as time goes on, we're gonna have more deals. We're gonna have more money. We're gonna have more money towards tracking that data. We're gonna have more lease comps. We're gonna have more overall market data for this raw asset type, if you will, that's gonna – over the next decade or two, is going to increasingly get more sophisticated and it's gonna to expand more and you know, we're gonna have the billions and billions of dollars that the institutional investors are putting into the asset type to thank for that.
Spencer Levy
So, let’s expand this conversation. Is it airports too? Is it also, I guess, boat dock areas? Because I mean, really, when you're talking industrial outdoor storage, planes, automobiles, boats, I wouldn't say trains, just to mention the great Steve Martin, John Candy movie, which I know is all of your favorites. But, let's expand the conversation to it's not just trucks. Nick, what do you think?
Nick Firth
Yeah, absolutely. I mean, we have airport adjacent sites. We're not on tarmac like real term with some of their facilities. You've also got intermodal. I'm going to try and do the planes, trains and automobiles for you. So, you've got the intermodals. So, the big rail yards, there's need for this product around there. And, obviously, there are needs around the ocean ports as well.
Spencer Levy
Got it. And, so, it really, it's a broad term, Industrial Outdoor Storage, but it's not just trucks.
Nick Firth
That is a great way to sum it up.
Spencer Levy
And, you know, what would be really interesting as we talked about technology here, we talked about this – the electrification of this, whether it's through electric chargers or solar panels or otherwise. But what we didn't talk about here is the change in technology for self-driving cars and they need a place to park. What we didn't talk about is drones that need a space to take off and land. And, so, there's a lot of things for these types of areas that people don't want this right next to their house. But they need it somewhere not too far from their house. Has any of that stuff come up yet, or are we still a few years away from that?
Brian Fiumara
I think you see a lot more people being prepared for the EV evolution, right. As far as making sure that they have the charging capacity. If you're near ports, as far as drones, not so sure about how that one's going to work out. But again, even fleets, right. Companies that have large fleets that will need charging in the future, or just need a place to put their cars, right in the meantime, you see that use that's out there right now, but there's always going to be innovation that's gonna help, it should help, this business over the next cycle for sure.
Spencer Levy
Anything that could be stored more efficiently outdoors will be stored outdoors because it's cheaper to store stuff outdoors than it is to store it indoors even in Minneapolis where it gets cold, uh, because in Minneapolis it is the home of – you know what it's the home of, Myles, in addition to Prince? It's the home of the Juicy Lucy Sandwich, which is the sandwich that has the cheese inside the burgers and, uh, you know what I'm talking about, Myles?
Myles Harnden
Of course, I'm aware of that. And whenever I get an out of town client, a national client, I try to take them to Matt's, the original Juicy Lucy place. It's one of my stops. So, yeah, I know the Juicy Lucy well. In fact, I took a national equipment rental – I took two of their managers there recently and it's certainly something that we try to utilize here.
Spencer Levy
And, then, you were partying like it was 1999.
Myles Harnden
That's right, that's right.
Spencer Levy
So, I wanna just talk about the future of the sector. We talked about a lot of the futuristic stuff around electrification, but really I think from a real estate perspective, I think this is a space that's going to be rolled up much more like self storage than any other sector that I've seen in a long time. But, I'll ask each of you what you see for the next five years in the sector. How about we start with you, Nick?
Nick Firth
This product's been around for a long time. It's been overlooked for a long time, um, we've kind of talked about industrial adjacent. That's exactly what this is, and Brian hit on investors are looking for yield. It's got extremely good fundamentals, so you're going to see a lot more demand from investors in this space, which is going to drive price in. But when you look at the actual fundamentals themselves, there's very little obsolescence in this space, um, which is a good thing. It's low cap X but strong rain growth. So, I think you'll just see more and more people investing in this product nationally.
Spencer Levy
Brian, how do you see the future?
Brian Fiumara
And Spencer, I agree. I think going forward also, if you think about warehouse industrial space, you know, we're just working on a big project in New Jersey and it had two high bay cranes in a, in a metal building, right. Typical industrial investors would want nothing to do with that type of space. There was no other crane served building available in the entire state of New Jersey than this one, right. So, it ended up with two great tenants in it with huge names that everybody would recognize at great rents. We get caught up in the 40 foot clear. How many trailer spaces, how many parking per, per 1000 square feet. Sometimes we get lost on some of the fundamentals of this business. Still are a lot of lay down yards. There's a lot of manufacturing that hopefully will be coming back to this country in the next four to six years, potentially where we're going to need more and more of this space. And it's very challenging to find this type of space, not just due to infill locations, but again, due to entitlement issues that always seem to pop up. And, even, environmental issues, right, that are on some of these sites that are heavier that you're gonna end up just paving these sites where there's no other utility for the site at the end of the day due to some environmental conditions.
Spencer Levy
And Myles, what do you see for the future?
Myles Harnden
Echoing what Nick and Brian have said, I'm going to see the expansion and sophistication of this asset class grow kind of what Brian was saying. A lot of these properties are mom and pop owns, legal, nonconforming or grandfathered properties that don't really have any institutional quality entitlement. So, as time goes by and these institutions are buying these properties, we're going to get them more formally entitled up to date with their standards on the way these properties are built. And we're gonna see more institutional product. We're gonna see better data, it's kind of fragmented at this time. I think we're gonna start seeing a higher quality of an IOS site. As the population continues to grow and the population becomes more urban, if you will, these infill IOS sites are continued to be at high end demand. And, I think, the values are gonna go up. And I see a really bright future for IOS the next couple of decades just based on these fund mills.
Spencer Levy
Well, on behalf of The Weekly Take, what a terrific conversation today about industrial outdoor storage with three experts in the sector, starting with Nick Firth, CIO of Industrial Outdoor Ventures. Nick, great job. Thank you.
Nick Firth
Thank you, Spencer.
Spencer Levy
Brian Fiumara, Vice Chair, CBRE. Brian, thanks for coming out.
Brian Fiumara
Thanks for having me, Spencer, appreciate it.
Spencer Levy
You bet, and Myles Harnden coming to us from the Twin Cities, home of the Juicy Lucy and Prince. Vice President, CBRE, Myles, great job.
Myles Harnden
Thank you, Spencer.
Spencer Levy
That was interesting, wasn't it? An insider's look at a relatively unknown corner of commercial real estate. Hope you found it as informative as I did. If you'd like to listen to other conversations about the industrial sector, or the wide variety of asset types we cover, please check out our website, CBRE.com/TheWeeklyTake. You'll find related content and our episode archive, too. In the weeks to come, we'll head off in some different directions, including trips overseas to explore European logistics and other international insights for investments, innovations and operations across our industry. For now, we hope you'll share this show and subscribe, rate and review The Weekly Take wherever you listen. Thanks for joining us. I'm Spencer Levy. Be smart. Be safe. Be well.
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