Why is IOS a thing?
I am not in the space but every time I hear about people doing these deals I scratch my head. Seen a couple groups only do IOS deals in the hopes of some portfolio exit.
Isn't is just short term truck parking leases? Is there credit there? Who is the end buyer? And how do you even value an exit? Is it that's it's industrial adjacent so it makes it attractive? I don't understand LP interest as it's so unproven.
I think the catch-all term of IOS is really just a way to further bifurcate the industrial space; I've seen truck parking and laydown yards called IOS like you mention, but also sites that have a low site coverage warehouse but a significant amount of acreage used to store things, like the name suggests. This can be everything from a construction equipment rental yard like United Rentals or Sunbelt to a facility needing to store precast concrete, steel, etc. before sale/installation, or even using raw materials in manufacturing in the building but still need to store a lot of it outdoors. As a result, the credit varies significantly but scales with the use of the land - a manufacturing company may have a guarantee while a simple truck parking operator/lessee might not.
You've also hit on some other complications, namely the size; these aren't expensive to create, and are heavily location-dependent to insulate from competition and also to lease. The name of the game is definitely aggregation and portfolio sales, because the individual assets are tiny (usually sub $20M) and often single-tenant, so the portfolio approach diversifies your income and gives a decent bite size. Decent IOS assets are valued like anything else, on a cap rate accounting for the risk and location.
So yes, it basically is truck parking and some other things, and scale seems to be the answer to a lot of the little foibles inherent in the subsector. Happy to answer anything further if you like.
I think a clear distinction needs to be made between infill IOS and tertiary IOS because infill places don’t have a lot of places to store stuff. But you look throughout the outer boroughs of NYC and North NJ, yes you absolutely can get an investment grade company to sign a lease with term. E.g., Wildflower in NYC. In my experience the short term rental IOS plays usually get much lower rents because lots of developers want the optionality to develop in the short to intermediate term and companies aren’t going to pay top dollar for rent if they can get kicked out on short notice. If you’re willing to lock up an IOS site for 10+ years in an infill location, you’re usually looking at much higher rents because companies need to have long-term predictability of where they are going to store stuff. If you have something that can be stored outside it is a lot cheaper to rent IOS space than warehouse space.
It’s your typical covered land play style investment, if you’re buying in the right neighborhoods and have very long-term capital to play with. E.g., Edison Properties and every guy who thought it would be a good idea to buy a parking lot in Brooklyn in the 60s-90s.
But to your point about LPs being interested in this. I think this style of investing is better suited for a multi-generational real estate family than a REPE fund with a ~5 year hold period.
I'm an analyst at a REPE shop with a distinct IOS fund. Our goal is to further institutionalize this asset class and exit the portfolio once large enough. We think we can get some decent yield compression in our exit.
Nice, so what sort of exit cap are yall underwriting? 5-5.50%?
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