What are y'all sizing to for IOS land? Hear rumblings from groups such as Zenith IOS that they're ~100 bps wide of class B industrial product.
Assuming same tenant credit and location, this yield spread seems thin for improved land.
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Ah, the intriguing world of IOS (Improved Operating Surfaces) land underwriting! It's a niche but fascinating part of the real estate investment landscape. Now, diving into the specifics you've mentioned, it's not directly covered in the highest ranked content on WSO, but let's break down the components based on related insights and general knowledge in the field.
When comparing IOS land to class B industrial product, a few key factors come into play:
Risk Profile: Improved land typically carries a lower risk compared to developed industrial properties. The improvements (utilities, roads, etc.) add value and reduce future development costs, but they don't generate income until developed or leased as is.
Yield Expectations: For class B industrial properties, investors expect a certain yield based on the income generated by the property. The yield spread mentioned, about 100 basis points (bps) wide of class B industrial, suggests that investors are seeking a slightly higher return on IOS land to compensate for the lack of immediate income and potentially higher development risk.
Tenant Credit and Location: Assuming the same tenant credit and location for both IOS land and class B industrial properties is crucial for a fair comparison. These factors significantly impact the risk and therefore the expected yield. High-quality tenants and prime locations generally lower the risk, potentially narrowing the yield spread between different types of investments.
Market Dynamics: The mention of groups like Zenith IOS targeting a yield spread ~100 bps wide of class B industrial product indicates a strategic approach to valuation. This spread reflects their assessment of the risk-return profile specific to IOS land in comparison to developed industrial properties.
In the realm of real estate investment, especially in niche areas like IOS land, the market is dynamic, and strategies can vary widely among investors. The yield spread you've mentioned seems to reflect a relatively aggressive stance, betting on the value-add potential of IOS land with a thin margin over the more stable, income-producing class B industrial properties. It's a calculated risk, assuming that the improvements and potential for development justify the narrower yield spread by offering a path to significant value creation.
Remember, the real estate market is nuanced, and strategies can differ based on a multitude of factors including market conditions, investment horizon, and risk tolerance. Always consider these elements when evaluating investment opportunities.
Sources: Industrial Properties - What are the key things to know?, Covered Land Play Ideas, What are the major overlooked markets currently?, Is there an ideal spread between Unlevered and Levered IRRs?, QE-squared | The Daily Peel | 12/21/22
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