Trends and recommendations
The UK market has been characterised by small landlords and is highly fragmented. An increasing number of yield-driven and opportunistic investors are targeting off-market pad sites, low-coverage locations and covered land plays, each providing a diverse set of opportunities for both short and long-term investment returns. The depth of capital of open storage investors can range from savvy local investors/developers to sophisticated national players and emerging groups backed by institutional or private equity. The nature of ownership means it is often difficult to deploy significant capital in a single transaction.
Internationally, in both the United States and Canada, we are seeing similar strong demand for logistics as cyclical vacancy rates persist at near historical lows. Constrained supply has exacerbated the need for open storage in locations such as Charleston, Houston, Mobile, Savannah, Edmonton and Calgary where energy & gas production dominated land will be required to store cranes, rigs, heavy machinery, drilling equipment, large vehicles or other operational materials that cannot be held in physical properties. Elsewhere land is sought for pallet storage and trailer parking and in the vicinity of ports such as Los Angeles.
In addition, post-COVID congestion has created acute demand for ”pop-up” container yards.
According to FreightWaves, Brooklyn-based Zenith IOS launched a joint venture with JP Morgan Global Alternatives in 2022 to acquire $700 million in industrial open storage investments and is now operational in 15 - 20 US markets. Additionally, Bay Street Capital has partnered with Drake Real Estate Partners to target $100 million in industrial outdoor storage investments by the end of 2022. Criterion Group and Columbia Pacific Advisors announced the acquisition of a 41 property, $360 million US open storage portfolio in March. They aim to grow their sector holdings to $1 billion over the next two years.
Likely the most pioneering investor is Chicago-based Industrial Outdoor Ventures, which focuses on mission-critical "Industrial Service Facilities", which feature a significant outdoor storage component. It has targeted investments in Atlanta, Dallas, Houston, Southern California, Denver and Phoenix, among other cities. Investors are attracted by higher returns, limited capital expenditure, low property taxes, cheaper insurance, strong supply/demand dynamics and relative ease of leasing and management. However, this type of use in North America is often not appealing to cities because of its appearance, so development permits are hard to secure.
Open storage represents a sector of the industrial market, providing a significant opportunity for an imaginative, customer-focused platform. Currently, the market is highly fragmented, and the use is seen as a stage on a journey to redevelopment, resulting in little investment in providing a good quality facility. Moreover, occupiers are seldom able to secure longer-term leases. The growing desire of occupiers for higher quality space which meets Health & Safety requirements alongside staff welfare and security needs should inform the design of the facilities and, at the same time, will establish a distinct brand identity
We suggest sites should be designed on a modular space that can be subdivided into a range of size combinations.
A security-fenced perimeter should be established with CCTV monitoring accessed by a security barrier. Within the site, individual areas can be created with Heras fencing. The site should be floodlit. A grid might be established across which occupiers can connect into mains services and, if required, modular offices, restrooms and WCs. Sites should be capable of providing vehicle charging, and thought given to future proofing via pipework for hydrogen networks. A concrete surface will provide a long-term, highly flexible solution; however, given the substantial cost, it will be appropriate to consider the alternative of Type 1. Whilst demand undoubtedly exists in most secondary and tertiary locations, and we initially recommend focusing on sites with well-located prime locations where the greatest demand exists. We suggest short and long-term leases should be offered to maximise appeal.
We see an opportunity to acquire land unsuitable for development, particularly in prime locations. For instance, we recently sold 8 acres which lay above and under power lines.
By creating a distinct product, there is the ability to create a brand which will help drive demand because of recognised quality and repeat business with existing customers. A Grade A product will provide strong rental growth opportunities because of product differentiation.
The pressure to develop industrial land has been significant, resulting in a shortage of bespoke open storage sites and those that have been available are often only for the short term. We expect that to continue, however, the pressures to sell to developers or for developers to start construction have eased, given the current exit yields and short, and medium-term forecasts. We see investors being attracted to this type of asset, where it is executed in the manner we describe, because of the ability to secure income growth from an investment ultimately underpinned by industrial land values. Whilst having low obsolescence, the sector is home to a growing number of businesses with strong covenants attracted to good quality space.