Monthly Archives: October 2023

The Rise of Industrial Outdoor Storage: CRE’s Latest Gold Mine

by: Cristina Sosa Lindo

As the world rapidly evolves, we see new concepts being born, and such is no exception for the industrial landscape. IOS, Industrial Outdoor Storage, is a relatively new commercial property type in the real estate world that grew as a result of the industrial boom the world experienced a few years ago when companies struggled to find proficient storage options (1). IOS refers to the practice of effectively using outdoor (industrial) space to mainly store vehicles, materials, and large pieces of construction equipment. With this said, they often partake as container storage and truck terminals. Most are sized between 2 to 10 acres, with a small building in the middle deemed for tenant’s use. While their look might not sound appealing to investors initially, their high returns lure them back to the deal (2). Their unattractive look, yet incredible returns, have made them proudly gain the name “a beautiful ugly duckling” by Green Street. They consider that “Industrial Outdoor Storage sites in infill submarkets are priced to deliver risk-adjusted expected returns that are superior to those available on most other commercial real estate property investments, including “traditional industrial.” (Green Street)  

The Industrial Outdoor Storage market has witnessed a remarkable surge in demand, effectively meeting the storage needs across diverse sectors. However, despite its rapid growth, the market remains underdeveloped, thus presenting a tremendous potential gold mine for investors (2). In a comprehensive report by Commercial Search, the valuation of the IOS market was conservatively estimated to exceed $200 billion, with continuous new investors and developers attracted to it. Aside from this, Green Street analysis highlights that the IOS is a “fragmented” industry where a considerable portion of its supply is owned and managed by conventional operational methods or individual proprietors, not part of big institutions or platforms. This portrays a compelling opportunity for developers and investors seeking to enter the market and capitalize on its growth trajectory. (1)

The widespread success of IOS can be attributed to various factors. Yet, most of it is attributed to its unique set of tenants and how they are responsible for directly impacting the supply chain. According to Green Street, the transportation and logistics sectors are the primary users of these spaces. Third-Party logistics companies strategically leverage the prime locations of IOS units, which are typically near highways, ports, and airports, to capitalize on transportation cost savings. By taking advantage of these convenient locations, logistics companies can reduce transportation costs and allocate more funds to renting IOS units, thus enhancing the supply chain operations and making IOS an influential factor in improving its overall effectiveness. (1) 

Due to many favorable factors, Industrial Outdoor Storage sets itself as an up-and-coming investment option. It portrays a compelling case for investors or developers seeking profitability with easy and cost-effective maintenance, consistent cash flows, low capital expenditures, and rapid growth in response to increasing storage demands. (3) However, its most enticing attribute is its relative newness in commercial real estate. IOS is the perfect opportunity for investors and developers looking for something new to build to capitalize on its current upward trajectory and position themselves for long-term success. Now is the time to take the risk and invest in this thriving sector. 

Here at Lever Capital Partners, we thrive on embracing risk and actively seeking out innovative investment opportunities. Our extensive experience in financing successful developments has allowed us to identify promising ventures, and we believe that Industrial Outdoor Storage presents an exciting opportunity for growth and profitability. We are excited to offer our support and financial backing for your development in IOS, empowering you to achieve new heights of success. With our expertise and resources, you can confidently embark on this journey, knowing we are fully committed to your project’s triumph. Contact us today, and let’s take the first step toward a rewarding partnership.

References:

https://greenstreet.com/insights/blog/industrial-outdoor-storage-a-beautiful-ugly-duckling https://www.commercialsearch.com/news/industrial-outdoor-storage-continues-to-grow/ https://rebusinessonline.com/stashing-success-the-growth-of-industrial-outdoor-storage/

From Dream Destination to an Oversupply in the Sun Belt

by: Connor Bobis

In the years preceding the widespread economic shutdown in 2020, the Sun Belt region experienced a stable demand for residential real estate that continued to grow even amid the pandemic. Throughout 2020 and 2021, cities in the Sun Belt, including Phoenix, Houston, Dallas, Austin, and Atlanta, collectively saw a population increase of 300,000 residents from mid-2020 to mid-2021 (1). This ongoing population growth transformed these major city hubs in sunny southern cities into attractive investment destinations, enticing both investors and tenants with the glimpse of favorable returns.

Fast forward a few years, a major ongoing trend shaping the real estate landscape in 2023 is the hybrid work model, which notably impacted the surge in residential leasing activity during the pandemic. The hybrid work arrangement had an evident effect on two property types: office and residential spaces. Despite these broader trends, the Sun Belt region saw robust rent growth in residential real estate since 2013 (2), solidifying its reputation as an appealing relocation for various tenants seeking remote work opportunities. Notably, apartment leasing rates in 2021 surpassed 2020 figures by 26%, although they didn’t fully reach pre-pandemic 2019 levels (3). This uptick in demand appeared promising to investors in multifamily units, leading to increased construction activity as the pandemic waned. However, the success of these new residential units entering the market hinges on stable demand within the Sun Belt throughout 2023 and 2024.

The evolving investment landscape in real estate has been shaped by population growth, heightened leasing activity, and the increased demand for residential units following the pandemic. As a result of these market dynamics, the number of development projects multiplied, responding to the demonstrated demand for residential spaces in Sun Belt cities as the economy emerged from the pandemic. In Q1 2023, CoStar data revealed an almost 4% rise in vacancy rates compared to Q1 2022. Despite this increase in vacant units, demand for apartment units from 2022 Sun Belt projects under construction continued to grow in 2023 (4). The success of these new units hinge on property values maintaining their integrity within existing lending parameters and prevailing interest rates.

Looking ahead to the remainder of 2023, the pressure to preserve cash flows against rising interest rates is mounting. Fluctuating cap rates could lead to the postponement of construction projects. Already, new construction in the Sun Belt surpasses that of 2022, and the vacancy rate for multifamily properties is on the rise. This trend is exacerbated by population growth struggling to match the influx of new residential units to the market. Ultimately, tightening finance terms amongst rising vacancy rates and further compressed returns could create an unfavorable investment environment for residential projects. Additionally, this will grow the need for alternative investment avenues such as REITS, crowdfunding, and gap financing, which will help alleviate the pressure of loan payments on potential profitability. 

For instance, the national average cap rate for multifamily units stands at 5.1%, while major Sun Belt cities are projected to decrease to 4.8% in 2023 for Dallas-Fort Worth, 4.0% for Phoenix, and 4.3% for Las Vegas (5). Despite these challenges, resilient returns for Sun Belt real estate investments are anticipated, contingent on property values remaining steady and rebounding to pre-pandemic levels. Nonetheless, the influence of vacancy rates on the newly introduced residential real estate supply by the close of 2023 remains  pivotal, and the profitability will significantly rely on the established lender relationships for obtaining essential capital at favorable terms.

Leveraging 14 years of expertise, the Lever Capital team specializes in facilitating connections between clients and lenders across the capital stack and in unique scenarios. Whether the property is in the Sun Belt or not, commercial real estate projects often encounter complexities upon completion. Allow Lever Capital Partners to lighten the load with our strong relationships across the entire country to secure the capital necessary for your next real estate project. 

References:

https://www.nytimes.com/2022/03/24/us/census-2021-population-growth.html https://www.clarionpartners.com/insights/sun-belt-apartments-multifamily https://arbor.com/blog/sun-belt-apartment-transaction-activity-post-covid/ https://www.costar.com/article/1837458446/the-supply-and-demand-paradigm-continues-to-shift-in-the-sun-belt https://base.berkadia.com/wp-content/uploads/2023/01/Berkadia-2023-Forecast-National-Apartment-Research-Report.pdf