What is Going On With IOS Industrial Outdoor Storage Space?
The industrial zone in Dakar, Senegal
The industrial zone in Trier, Germany
The Inflated Value of Industrial Outdoor Storage in America: Unpacking an Asset Class Anomaly
The real estate landscape in America has always been dynamic, often reflecting broader economic trends and shifts in consumer behavior!
However, a particular segment of this landscape, the Industrial Outdoor Storage (IOS) sector, which essentially comprises parking lots for delivery trucks and other commercial vehicles, has been exhibiting an anomalous trend in valuation over the past two years!
Moreovr, this phenomenon presents a curious case of inflated values in the commercial real estate (CRE) market.
The IOS Boom: A Sudden Surge in Valuation
Jake Sharp commented:
“I’ve seen 10 X Valuations and trades of parking lots that had elevated values at $1,000,000 suddenly get an Amazon Lease or Affiliate and jump to $10,000,000+ valuations in the snap of a finger!!!! Now I appreciate the Lease brings value but not a 10 X+ jump in value, there is sooooo little cost to create & maintain a parking lot so lenders loved this space and loaded up ultra high 90%+ LTV Bridge at 15%+.”
Industrial Outdoor Storage, a rather unglamorous yet functional aspect of industrial real estate, has seen a staggering increase in valuation! As a result of a single lease often that can become cancelled in a heartbeat!
The Underlying Economics: Perceived vs. Actual Value
The economics behind such a valuation surge are puzzling. Traditionally, the costs associated with creating and maintaining a parking lot are relatively low. The inherent value of these spaces should logically reflect this. However, the market has been witnessing a stark divergence from this logic. The question arises: does a lease, regardless of the lessee’s prestige, genuinely justify a tenfold increase in property value?
Lenders’ Role and the Risk of Over-Leveraging
Lenders, attracted by the low maintenance and operational costs of these IOS spaces, have shown an eagerness to finance them. Many have offered high loan-to-value (LTV) ratios, sometimes exceeding 90%, with significant interest rates.
This aggressive lending behavior became predicated on the inflated valuations, potentially setting the stage for financial instability!
The Brewing Storm in the Trucking Industry
Furthermore, the trucking industry, integral to the value proposition of IOS, is currently facing significant challenges. With the industry “imploding,” the foundational need for these storage spaces is in jeopardy. This downturn further exacerbates the issue of overvalued IOS spaces. For further reading on the trucking industry, see: Why is the freight market so bad right now?
The Overvaluation Crisis: A Bubble Ready to Burst?
The current situation in the IOS segment of the CRE market can be likened to a bubble, inflated by optimistic valuations, aggressive lending practices, and an overreliance on high-profile leases. The real worth of these properties, arguably much lower than their current market valuations, reveals a concerning disconnect.
Implications for the IOS Space and the CRE Market
The IOS space, once considered a low-risk and high-reward asset class, is now poised on the brink of a reality check. The properties valued at $1,000,000, which in a more realistic assessment might only have a worth of $200,000, and heavily leveraged. This over-leverage on already overvalued properties is a ticking time bomb for investors and lenders alike.