What’s Fueling Industrial Outdoor Storage Deals With Andrew Wiesemann – RFP 83 Transcript
Gordon Lamphere (00:04): Hi, I’m Gordon Lamphere, and welcome to The Real Finds Podcast, where we have real conversations with key entrepreneurs, activists, and researchers who are shaping the real estate industry and, as a result, our world. On today’s podcast, we’ll be speaking with Andrew Wiesemann of Matthews Real Estate Investment Services. Andrew is an industrial outdoor storage, or IOS for short, expert whose practice focuses on the southern United States. On the podcast, he explains the factors driving the rise of IOS, and the challenges and opportunities posed by increasing zoning regulations that particularly affect the asset class. Our conversation delves into market dynamics, profitability, investor appetite, cap rates, and the distinctions between Class A and Class C IOS properties. If you’re interested in the IOS asset class, today’s episode is well worth a listen. Andrew, thank you so much for hopping on the podcast today.
Andrew Wiesemann (01:11): Gordon, how are you doing today?
From Chicago Multifamily to IOS
Gordon Lamphere (01:13): Good. I think it’s always particularly valuable when we reach out to folks who are experts in markets outside our own. Before we dig into IOS, which is one of the hottest asset classes in the market right now, how’d you get into the real estate game? That’s always an interesting perspective on each guest we have on.
Andrew Wiesemann (01:38): Sure. I started in real estate back in 2013. I was in the multifamily business in Chicago, buying apartments for my family office. So I started on the principal side in Chicago and moved to the industrial sector four or five years after buying multifamily.
Gordon Lamphere (02:04): Two hot asset classes. What got you into industrial, and then IOS?
Andrew Wiesemann (02:10): Multifamily tends to be very management intensive. I was looking to streamline our portfolio into more easily managed assets, like the triple net leased, single-tenant assets you find in industrial. I was trying to find assets like that outside of Cook County, because we started getting hit with tax increases. So I started buying single-tenant industrial assets in Wisconsin and Indiana. Then in 2019, I came across a ten-acre site in Lansing, Michigan, with sixty thousand square feet. The two tenants at that facility were using the outdoor storage as a major component of their business.
What’s Driving the Rise of IOS
Gordon Lamphere (03:05): For somebody who’s interested in IOS, industrial outdoor storage, what has led to the rise of IOS, and what’s the primary driver?
Andrew Wiesemann (03:20): The primary driver is a lack of supply due to zoning regulations. Each municipality has different zoning categories, but what’s similar is that they’re all restrictive. I’d take it back to the early 2000s, when there was a lot of big-box development going on throughout the United States. All these developers started buying industrial-zoned land, probably without taking into account whether it was heavy, medium, or light industrial. They were probably buying heavy industrial zoning, which is primarily the only industrial zoning category that allows outdoor storage as a use by right. So big-box development, by its nature, created a lack of supply.
Going further, as you build more big box, there’s higher demand for the complementary businesses that help build and manage those big-box sites. Take scissor lifts, for example. You always see scissor lifts being used at large big-box industrial facilities. Think about California, where zoning is very restrictive. There are some municipalities that don’t allow outdoor storage but do allow big box. So think about trucking a scissor lift thirty to sixty miles to get it there. That’s not very efficient, but it’s going on today, and it’s a major struggle for a lot of equipment suppliers, so to speak.
Gordon Lamphere (05:10): It’s a strange reality. I’ve been talking with a lot of economic development folks over the last couple of weeks as a quarterly check-in, and one of the interesting things is that so many of them will see a truck storage site and say, “My gosh, these people must be economically hurting. Look at all these trucks.” And I’ll say, “They might be on a beach somewhere.” This is a very different world than maybe 1970 or 1980. The junkyard or the scrap or trucking use might actually be the most profitable use you can imagine in your community. What do you think is primarily driving that profitability for investors?
Andrew Wiesemann (06:03): First, you have to think about it from the user’s perspective. With the growth of e-commerce and warehouse distribution, there’s been a huge increase in the number of truckers on the road. They say only one out of thirteen truckers will have a place to park at the end of the night, and that’s long-haul truckers, for that matter. You used to see trucks parked in the parking lots of the Walmarts of the world, the Kmarts back in the day, the Targets. They’ve become more restrictive about who they allow on site. I think Walmart put it out nationwide that they no longer allow truckers to park their trucks overnight. And for safety purposes, police and state troopers aren’t really allowing truckers to park on the side of the road anymore. So at the state and federal level, they’re starting to build more truck parking facilities.
But that’s just one component of the IOS game. I’d say maybe ten to fifteen percent of all IOS users are trucking related. Then you’ve got all the other users: heavy equipment, waste management, and utility infrastructure companies, which are a huge user right now and have been very active, not just in DFW but nationwide, in taking up a lot of these IOS yards. Building supplies: you have the ABCs, the Beacons, or QXOs of the world, and Foundation Building Materials. They need high-quality sites.
And talking about user demand, I think as time has gone on, municipalities have started to get a lot smarter about this. A lot of times these municipalities were once allowing it. Like you said, you look at the zoning and you see this truck parking lot.
Andrew Wiesemann (08:24): It might be commercially zoned, but they’ve been active there for ten-plus years. Sooner or later, when the trucks leave that yard, a lot of times they don’t get that use back. So that becomes more restrictive. While you may see a lot of users in the marketplace with older facilities, once those become vacant, they may no longer be usable for this type of use going forward. That keeps adding to the limitation on supply.
These users also stay put over time. You can go see a United Rentals location with a fourteen-foot clear height building where they’ve been for fifteen or twenty years. They probably won’t leave that site, because they have that market covered, and they have so many different divisions in their business. They could put in a general rental operation, maybe not with fourteen-foot clear, but generators or construction services, the parts of their business that don’t necessarily require big clear heights. But zoning is really, first and foremost, why supply is limited and why you’re seeing rental rates go up.
I think the reason a lot of these institutional groups and the big capital coming in from the Blackstones and the JPMorgans are so attracted to this today is probably the mark-to-market opportunity, because it’s such a fragmented market. Every day we’re talking to owners who have owned these sites for twenty to thirty years. They’re probably using them for their own business. And you have to think about the generational turnover today. That’s another reason: you’re seeing the opportunity for an individual to exit and make pretty good money selling the asset, while a new owner can come in and lease it out at a pretty decent rate. And if it’s not an owner-user occupying the building, it could be an owner who’s held the property for 20 years.
Andrew Wiesemann (10:45): Say it’s a United Rentals that’s been there for fifteen or twenty years. They’ve probably had a ten-year lease at way below market rents, with two five-year options, increasing only two to three percent a year for fifteen to twenty years. So there’s still that mark-to-market opportunity for investors.
Generational Turnover and Code Compliance
Gordon Lamphere (11:07): That’s a fascinating point, particularly the generational turnover. We’ve seen a tremendous amount of that, and a tremendous amount of opportunity, particularly on Chicago’s North Shore and in some of the higher-priced areas. A lot of older junkyards, scrapyards, and automotive users whose kids aren’t taking over the business are looking to sell, and some of them are sitting on a gold mine. How do you see that shift playing out across markets? How are communities dealing with it when maybe it’s not an automotive user anymore, but a landscaping company or somebody else who needs outdoor storage? How are communities perceiving that, and how can investors understand how a change in ownership might affect the viability of a property?
Andrew Wiesemann (12:12): Sure. I dealt with this specifically a couple of months ago in the San Antonio market. An owner had held the asset for 15 years, with a single tenant in there the whole time. While the site itself was zoned appropriately, that user had been in there so long that they didn’t even have a certificate of occupancy on file.
The buyer that came in fought out a very aggressive cap rate, mind you. Through their due diligence, they realized certain aspects of the site didn’t meet today’s code for improvements: new, higher fencing, landscaping improvements, parking improvements. A lot of these sites will need improvements along the way. I think investors today need to be very cognizant of that. There is that mark-to-market story, and that’s what everybody’s chasing. But because these assets have been occupied for a very long time, they might not meet the municipality’s standards today. That’s something people really need to be cognizant of.
Who Is Buying IOS
Gordon Lamphere (13:45): Another thing we need to be cognizant of is what investor appetite actually looks like. It’s great to say there’s a tremendous amount of potential in this asset class, but who is buying IOS today, and how are private and institutional capital inflows playing out for the listener who’s sitting on an IOS property?
Andrew Wiesemann (14:13): Sure. You have everyone from private clients all the way up to the big institutional operators buying these assets. The big institutional players’ bread and butter is buying an asset with that mark-to-market story we’ve talked about, with a shorter WALT, call it three, no more than five years, where they can roll it into their fund and then sell it to the next buyer with the mark-to-market story.
They will buy stabilized assets, because you’re starting to see a lot of newer development and newer leases with five- to ten-year lease structures, where it’s really a cap rate type of buy, a stabilized buy. But you may not see those operators get as aggressive as, say, a private client who really wants to add the asset for cash flow, for income, or who may have a 1031 exchange they’re trying to trade out of. They could buy at a more aggressive cap rate. I’ve seen quite a few stabilized deals with longer-term WALTs trading between a six and a half and a seven cap, and typically that’s a private client who looks at it more like a retail buy than a traditional industrial buy, so to speak.
IOS Cap Rates Versus Traditional Industrial
Gordon Lamphere (15:48): What are the market dynamics between a traditional cap rate for an occupied industrial warehouse and cap rate trends for IOS?
Andrew Wiesemann (16:02): That’s a really good question. Right here, right now in Dallas, you’re seeing cap rates for traditional industrial fall around five and a half percent, and I think that could be the case in any major metro for institutional-quality assets. Today, on stabilized IOS portfolios, I know of a number that have traded around a 5.8, call it between a 5.5 and a 6 cap. I think that’s more due to the amount investors are able to deploy. Look at a single asset, and I think it’s going to be a lot harder for it to trade at those numbers than a portfolio. But later down the road, I think you’ll start seeing more cap rate compression. As more and more people try to find this type of asset, cap rates are going to get more compressed just because of the lack of supply.
Gordon Lamphere (17:14): Why do you think there’s generally a wider cap rate? One of the things we’ve found when pitching investors in the Chicagoland or Wisconsin market is that they tend to see IOS as dirty, or see all this risk and liability with trucks or outdoor storage compared to a standard Class B or Class A warehouse. Is that what you’re seeing in the market a little south of here, or is something else going on?
Andrew Wiesemann (17:45): I think the reason there’s still a spread is the lack of understanding and the lack of comps and data. I think we’re so early on. You’re still trying to educate the lenders out there, and the buyers too. A lot of these buyers are national buyers, and you have to educate them on the market. That’s our job as brokers: to provide them with market data. I still think we’re early enough that you’ll see that spread between traditional industrial and IOS, but I think it’s quickly closing.
Sooner or later, especially when you start seeing development occur, you’ll see the institutionalization of this, and you’ll really start defining what’s truly a Class A IOS facility versus a B or a C. It’s a continuous discussion in this asset class: how do we get to standardization? It’s hard to say right now, but as more data becomes available, more buyers come in, larger transactions take place, and capital becomes more comfortable lending on and buying this, you’re going to see that spread lessen for sure.
Class A Versus Class C IOS
Gordon Lamphere (19:18): If you had to shoot from the hip, what are the primary distinguishing marks between a Class A and a Class C IOS property?
Andrew Wiesemann (19:34): Absolutely. When I think about that differential, I look at it from the user’s standpoint. How are users going to pick one asset over another? Say it’s the same market, same acreage, and same square footage. What are the key attributes that make one site better than another?
Users look at safety as a major component in picking a site, so they want easy access. Usually they want two points of ingress and egress, in and out of the site. They want good flow, because a lot of these users have big trucks, so they need good turning radiuses and need to be able to access the site at good speeds.
I’d say the type of stabilization on these yards is very important, and that’s more municipality driven. Say you have a forklift manufacturer that wants to store forklifts on site. If you’ve ever tried to drive or store a forklift on gravel, you know it’ll sink very quickly. So you want concrete. Heavy equipment users may not need concrete on the whole yard, but around the building it’s going to be more beneficial. So for stabilization, more concrete than gravel is probably preferred. Then clear heights, door heights, and the office-warehouse mix are important as well, and lighting and security play a factor too. Those are a lot of the key aspects of site selection I look for. You don’t necessarily have to have highway frontage. I’d say accessibility to the highway is more important for these users than being on the highway.
Rents, Affordability, and Market Selection
Gordon Lamphere (21:29): Ultimately, location is probably the greatest driver of value, and particular locations have the greatest potential for price increases, a lot of which comes down to market constraints. Which markets do you think are most likely to see the greatest upside over the next five or ten years, relative to markets with fewer supply constraints and greater availability?
Andrew Wiesemann (22:06): DFW is a great example. It’s such a large market, but there are a lot of users in it too. You’re going to continue to see that generational shift occur, with investors still looking into this market. Today you’re looking at an average of $5,500 to $6,000 an acre per month for infill sites. It can go up to $7,500, and I leased a site for over $10,000 an acre earlier this year. So for smaller sites, one to three acres, you’re starting to see real rent appreciation, hitting close to $10,000 an acre per month, and then it gets watered down a bit as the sites grow in size.
But at the end of the day, you can only have so much rent appreciation, because users can only afford so much. Take a national equipment group, for example. They’ll take every market and figure out the market size for their industry in that market. Then they’ll ask, how much market share can I get? From that, they’ll look at what their gross revenue will be for that particular site. Most users look at each site as its own little island from a revenue perspective. They take that gross revenue and multiply it by a rent factor for what they can afford, typically two to five percent from what I’ve seen. That’s how they determine what they can afford in rent in that market.
I was doing this math earlier today. If they say they can generate seven million dollars a year out of one location, their rent could be roughly thirty thousand a month, triple net. That’s how we look at it and try to stay within it, because if you back it out and compare it to market rents, it’s actually pretty spot on.
Gordon Lamphere (24:30): Those numbers aren’t vastly different from what I’d mark for the Chicago market. One of the greatest nuances I see across markets, between Chicago and even the Wisconsin market we serve, is the operational nuance among users. What types of tenants and lease structures are you seeing on the rise, and how is that playing out in Dallas?
Andrew Wiesemann (25:03): I do a lot of work in the equipment rental space, and construction is pretty rampant here, so you’re seeing a lot of construction equipment users enter this market. I’d also say utility infrastructure companies are really big right now, with data center development in core markets.
Having spent time in Chicago, I’d say that’s a very core market. One of the things I look at, and there are trends across the US that follow this, is highways and infrastructure. From Chicago all the way down to Joliet and Bolingbrook, you have huge logistics corridors. You have great intermodals, inland ports, and water ports down in Joliet. And you have the highway systems: 80, 55, 94, all of those. So Chicago is just a very good market. I’d say the same for Memphis, Kansas City, and DFW. Not only private investment but public investment dollars have gone into those markets, and that’s a huge driver for industrial outdoor storage.
From a market perspective, I look for those attributes when I go looking for IOS sites, because I know there’s going to be constant demand thanks to the public and private investment in those municipalities and markets. That’s how I differentiate markets. A lot of investment groups do it by size, but I take it a step further and look at the infrastructure a market has. No one looks at, say, Mobile, Alabama, as a primary market. However, Walmart moved a lot of their freight from the West Coast to Mobile. So I’d say the
Andrew Wiesemann (27:23): port infrastructure they’re continuing to grow in Mobile makes it a very attractive market for IOS investors. Same with Savannah, and a lot of the East Coast ports. New Jersey and New York have been large ports for a long time, but other ports are opening up because of the shift of business from the West Coast to the East Coast. So it’s a very fluid thing, for sure, but look at the infrastructure in place to determine a lot of that demand.
The Biggest Risks in IOS
Gordon Lamphere (28:01): Infrastructure is ultimately a huge driver of IOS need, and as somebody who focuses on the Chicago market, there’s no greater reason why Chicago has been able to weather absolute mismanagement over the years and still be a generally financially sound economy. But we have all sorts of risks associated with our business. Many real estate investors I’ve talked to, and I’m sure you’d say the same, are risk averse. That’s one of the reasons they’re in real estate: it’s a less risky way to grow capital and family wealth. Where do you see some of the biggest risk factors in IOS, and what risks should people watch out for?
Andrew Wiesemann (28:51): Sure. Today, after three or four years of all this aggregation, one of the things I’ve started to notice is that a lot of markets have already been covered once. Us brokers do a really good job canvassing markets and identifying opportunities for investors to aggregate. Since this has gone on for a few years now, I’m seeing that a lot of the sites still available just don’t work. They’re not as functional as the ones already acquired.
So the next phase of this asset class will be development, and you’re seeing a lot of development start to take place. However, a lot of it is happening on the outskirts of the core, trying to capture growth in these new markets. By doing that, these developers are taking on considerable risk. While we have comps for the infill core market, you’re balancing yield on cost on a development against what market rents are going to be. You’re essentially creating the market rent in these newer markets, because there aren’t existing uses there. So I feel the greatest risk over the next three to four years, as this continues to grow, is development risk, and I think we’re all trying to figure that out now. One way to find a happy medium on rent is to run your yield-on-cost metric, but also talk with users who are in, or want to be in, that market, and do the arithmetic we did earlier on how much they can afford based on the revenue the market will give them.
Gordon Lamphere (31:08): That’s great advice. We’ve worked with a number of occupiers over the last five years who went out, bought sites, and tried to get them zoned, going further and further out into communities to make something work. There’s a lot of risk there, and in doing it right. On the investor side, one other thing I’d like to touch on is operator risk. There’s always potential downside with the economy and how it can affect trucking. Trucking is very economically sensitive, like a lot of industries. How are you seeing that play out with tenant credit, and how are folks evaluating what a good tenant is?
Andrew Wiesemann (32:04): I’d say the first part of this year was pretty slow in terms of tenant demand. Everybody was trying to figure out what the tariffs were going to bring, so a lot of groups were pencils down. Today, you’re seeing a lot more user activity and demand.
From an operator standpoint, they typically want three- to five-year leases at a minimum. They’re definitely doing credit checks to see whether tenants are financially stable enough to make these commitments, and they’re looking at the tenant’s overall business plan as well. I had one operator ask a tenant for their five-year business plan. The tenant was in the hardscape business, and they showed considerable growth because they’re in a growth market where they’ll be able to tackle all the residential growth there. So it was a good business plan for that specific site.
They’re definitely taking into account credit, the size of the business, how many employees it has, and what kind of taxes it can pay, because they also need to get the municipality comfortable with the use. If you can show the municipality the creditworthiness of the tenant, it goes a very long way. I’m dealing with this in three municipalities right now, trying to get COs for some users, and showing the tenant’s business plan, their expected annual revenue today, and what it will be five years down the road helps tremendously with the municipality.
What to Check Before You Buy
Gordon Lamphere (33:59): Before we get to our Final Four and wrap up, there’s one question I’d really like to ask for investors evaluating a deal. What are the biggest things they need to look at before putting their toe in the water? A lot of our subscribers, and people who subscribe to our blog and newsletter, always ask about IOS and how to look at an IOS deal, because it’s the hottest class, at least in Chicagoland, in many ways. If you have a tidbit of advice for anybody who’s looking, what would it be?
Andrew Wiesemann (34:40): First, look into the zoning. That’s number one. The second thing I’d advise is looking at market rents and replacement rents. These tenants tend to be really sticky, but the last thing you want is to have to find another user because yours moved out. So make sure your rents are at or below market. Then look at the long-term functionality of the building. Over the years, I’ve seen users go from looking for fourteen-foot clear heights five years ago to a minimum of twenty now. As users’ equipment and needs evolve, the specifications for these sites get bigger. They do. So when you find an asset you want to invest in, make sure it will still work for users five or ten years down the road.
That’s how long these users want to be in these facilities too. A lot of the users I work with want to sign ten-year leases, while operators typically want to sign five, so there’s that balance. But users want long-term homes. They don’t want to find new sites every five years, because they know rents are probably going to grow in five years, so they want to lock those leases down. As an investor, what I want to make sure of is that I have an asset that will be a good long-term home for that user.
The Final Four
Gordon Lamphere (36:14): So what does the future look like five or ten years down the road?
Andrew Wiesemann (36:19): I think there’s going to be continued aggregation in the space. There’s talk about sovereign wealth funds getting into it. You’re going to see more recaps from these operators. Maybe you won’t see as many assets trade fully. Maybe it’ll be one institutional investor buying out another, with the operator staying in place. Maybe we’ll see a couple more REITs enter the space, like Peakstone did last year. I think you’ll continue to see aggregation, portfolios moving from complete sales to recaps, and larger institutional players getting involved.
Gordon Lamphere (37:07): Tackling our second Final Four question: what advice would you give a young Andrew getting involved in real estate, or just some life advice in general?
Andrew Wiesemann (37:24): Pick one thing and stick with it. Become an expert in that one thing. Early on, I was doing any kind of industrial. I was up in Lake Forest knocking on doors all over Lake County, anywhere from ten thousand to a hundred thousand square feet, and I was calling on anything. It wasn’t until I specialized in this type of asset and understood all the different users for it that I became an expert, so to speak, and could speak knowledgeably about it. So for anybody getting into real estate, or any kind of career, become a specialist in one specific thing.
Gordon Lamphere (38:14): Yeah, niching down is important. One of the ways we also find a lot of value is looking at others’ perspectives on the world. That’s one of the reasons we have this podcast, and one of the ways we do that outside of podcasting is through books. For somebody interested in real estate, what book should they pick up next?
Andrew Wiesemann (38:37): I’ll be honest, I don’t know the last time I finished a book. I have a tendency to start and not finish.
Gordon Lamphere (38:46): That’s still reading. You’re just not sitting through it.
Andrew Wiesemann (38:48): Still reading. Lately, over the last couple of years, I’ve been really into podcasts. When I moved to Dallas, one thing I found very helpful for entering, or re-entering, this market was listening to local real estate professionals on podcasts. One was Jeremy Mercer’s podcast, The Industrialist, where he brings on a number of brokers in our market. When I moved here, I started listening, and he had every single market specialist on, so I learned the market that way. That was very helpful. Kyle Matthews has his own podcast, and Chris Powers has another. I listen to all of those, because even when it’s not a real estate professional on the show, they bring viewpoints I may never have thought about before. That’s been helpful for me.
Gordon Lamphere (39:45): Those are all great podcasts. I’m less familiar with Jeremy’s, but I’m very familiar with the Matthews podcast and The Fort. Those are all great names, but is there anyone else influencing the world of real estate we should have on the podcast next?
Andrew Wiesemann (40:05): Hmm. You know who I would love for you to have on the podcast? I don’t know if it would be possible, but Brad Jacobs at QXO.
Gordon Lamphere (40:16): Okay. I’m familiar with him. Yeah.
Andrew Wiesemann: With XPO, United Rentals, waste management, all the businesses he’s helped build are IOS users. So I would love to hear from the gentleman who created or expanded all of these companies how he sees our asset
Andrew Wiesemann (40:37): class. I think that would be a really good podcast.
Gordon Lamphere (40:41): That’s how most professionals from outside real estate end up on here, and that’s the whole reason we have this podcast: to learn and grow. If somebody wants to learn and grow by reaching out to you, what’s the best way to get in contact?
Andrew Wiesemann (40:58): Call my cell phone. I’m pretty responsive on my cell. Or shoot me an email. I’m happy to talk to anybody about industrial outdoor storage, real estate, or life in general.
Gordon Lamphere (41:11): Andrew, thank you so much for hopping on the podcast today, and we’ll have to have you on in the future.
Andrew Wiesemann (41:17): Absolutely. I enjoyed it, and thank you for having me.
Gordon Lamphere (41:21): Thanks again to Andrew. We appreciate his insights. If you enjoyed the podcast, please give us a like, a five-star rating, and a review. Your comments, interactions, and subscriptions truly matter and help us continue to bring on quality guests. You can find us on YouTube, Spotify, or wherever you get your podcasts. I’m Gordon Lamphere with The Real Finds Podcast. Thank you for listening.
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