Everyone is becoming more accustomed to seeing small trucks roam their neighborhoods, delivering goods ordered online.
But even as the coronavirus pandemic greatly intensified demand for these services, most municipalities are reluctant to approve proposals to develop new industrial service facilities where distributors and other businesses can store, maintain or dispatch vehicles, heavy equipment or bulk materials.
“Nobody wants to live next to a truck terminal,” JLL Senior Associate Kate Coxworth said. “That not-in-my-backyard, or NIMBY, attitude keeps new supply low, sending rental rates soaring for existing industrial service facilities in markets across the U.S.”
That’s helped in the past 12 months to draw in a new cadre of developers and investors who now see these facilities as an essential component of the rapidly expanding industrial sector.
“These facilities are the skeleton of the supply chain, and there are more people making the discovery that there are real opportunities here,” Industrial Outdoor Ventures CEO Tom Barbera said.
Barbera started Schaumburg, Illinois-based IOV about five years ago, and for most of that time, only three or four other firms specialized in acquiring and developing properties within the niche sector, he said. But things changed in 2021. A new group of six to eight firms is now out there and has made the market for industrial service facilities more competitive.
“And I think we’ll continue to see new folks get involved,” Barbera said.
National investment players have also joined the fray. IOV formed a joint venture in March with San Francisco-based Stockbridge, planning to make between $100M and $200M of acquisitions annually. IOV completed 24 acquisitions in its first four years, but thanks to the new joint venture, it has picked up the pace and has closed 16 new acquisitions since February.
That includes the 39K SF 1401 North Farnsworth Ave. in Aurora, Illinois, a Chicago suburb, and the 22K SF 4212 Perry Blvd. in Whitestown, Indiana, an Indianapolis suburb. Both are 100% occupied by MacQueen, a fire truck and emergency equipment provider that uses the properties for truck maintenance and repair.
“By the end of this year, IOV could close on another 20 properties and be in at least a dozen major metro areas, including South Florida, Atlanta, Chicago, Dallas and Houston,” Barbera said.
JLL also recognizes ISF’s growing importance as an asset class, and plans to establish a group of specialists that will handle such transactions, according to Coxworth, who helped represent IOV in the Aurora and Whitestown deals.
“JLL researchers have started tracking the nationwide vacancy rate among ISF properties,” Coxworth said.
It now stands at 3.1%, and with many municipalities expected to continue blocking new facilities, especially in dense residential areas now served by so many delivery trucks, investors can be confident the market will stay tight. In addition, ISF tenants promise steady returns.
“Almost all of the tenants are signing 10-year leases because they all understand that this is a hard commodity to find, and once you do, you better hold onto it,” Coxworth said.
These tenants have shown a willingness to pay much more in rent as the industrial boom continues, according to Timber Hill Group Managing Partner Cary Goldman, who founded the Chicago-based firm in 2018. The first truck parking facility he bought was near southwest suburban Stickney and Chicago’s Midway Airport, and tenants typically were paying about $135 per month for each space.
“But spaces in the same area now go for between $275 and $300,” Goldman said. “And spaces near Chicago’s O’Hare Airport can cost $375 and are trending toward $400. What other sector has seen its rental rates more than double in just a few years? Although that will certainly help bring in more investors, it’s a management-intensive business, and actually operating industrial service facilities will probably stay with specialists.”
Unlike the new distribution warehouses so popular with investors, ISFs sometimes have hundreds of tenants, each needing just one or a few truck spaces.
“It really is akin to self-storage,” Goldman said. “And setting rental rates isn’t easy, as no one tracks the information needed to generate comps. There is no CoStar for truck parking places, The information is not easy to obtain and it takes a lot of real ground-level research. It’s also not a trophy asset,” he added. “It doesn’t look pretty on a brochure. It’s a lot of gravel behind a fence.”
Timber Hill Group now owns 16 assets, according to Goldman, and like IOV, plans to keep buying. It formed a joint venture in September with Chicago-based Champion Realty Advisors, and over the next 12 to 18 months the venture plans to acquire $150M of assets in infill locations near road interchanges and rail networks.
He said he expects that the market for ISFs will soon get even tighter in most metro areas. Not only is it tough to get the proper zoning and other approvals from cities for new truck parks and storage areas, but ISF owners can frequently score deals to transform existing spaces.
“Supply is actually coming off the market, because it’s being converted to other uses, an added bonus for ISF owners, Goldman said. “It provides good cash flow while you wait for great development opportunities.”
Source: Bisnow