J.D. Salazar has long understood the benefit of targeting a niche. It’s why the firm he founded, Willowbrook, Illinois-based Champion Realty Advisors, specializes in investing in and managing industrial service facilities.
These facilities, also known as outdoor storage facilities, are used mainly by transportation companies to store, maintain or dispatch vehicles, equipment and materials. Companies involved in the equipment rental and repair industries also occupy these facilities.
Investors have long overlooked this segment of the industrial real estate market. This isn’t surprising: Many investors are focused on warehouse and distribution space, a segment of the commercial real estate market that until recently was hot.
Industrial service facilities, though, offer another option for investors who are looking to diversify their commercial real estate holdings. And while even this subsector of the industrial market is struggling today thanks to high interest rates, Salazar says that these facilities are still an attractive option for investors looking to branch out with their dollars.
We spoke with Salazar, chief executive officer of Champion Realty Advisors, about the benefits of investing in industrial service facilities, why he’s focused on this niche for so long and when he expects the industry to begin its rebound from the impact of high interest rates.
Why have industrial service facilities been such a niche side of the industrial market for so long?
J.D. Salazar: I’ve been in this specific business for decades, long before industrial outdoor storage space and logistics-related real estate became the favored niche in the industrial sector. I was looking for something different and for something that I knew could provide solid returns and performance. Industrial service facilities fit that.
The amount of money targeted by institutional investors for industrial real estate in general has grown significantly since I entered this business. When I started in 1985, you didn’t have REITs. You didn’t have the BlackRocks and Brookfields of the world. The bigger investors weren’t putting money into industrial. The entrepreneurs and insurance companies were the ones buying and investing in industrial real estate. That changed rapidly in the 1990s. The REITs began raising money. Private REITS and massive private equity funds began pouring money into industrial real estate.
Even in the 1990s and most of the early 2000s, the industrial service facilities remained a niche that was pretty much under the radar. The institutional investors couldn’t buy $150 million of these facilities. Most of the transactions for industrial service facilities are in the $5 million to $10 million range. An institutional investor might want to buy a 1-million-square-foot building. To do the same thing with industrial service facilities, they’d have to buy 10 to 15 properties. The easiest path for institutional investors to allocate their resources continued to be by investing in the big industrial buildings.
Are more companies and investors getting interested in industrial service facilities?
Salazar: There were guys like me and a few others who recognized the value in aggregating industrial service facilities. You are seeing more of that today. A lot of companies that have secured capital from bigger institutions are aggregating the assets into a pool that will eventually contain half-a-billion dollars’ worth of assets. This approach has become more popular since 2016 and 2017.
Still, even with the increased attention they are now receiving, industrial service facilities are still relatively scarce. I’ve done the research. The share of industrial service facilities or outdoor storage facilities in the general industrial supply in, say, Chicago, is maybe 4% to 5%. That is pretty much the same across the board in other markets. It’s even less in markets like Miami and Seattle, where these facilities make up closer to 3% of the total industrial base.
Then there’s a market like Houston, which probably has the largest percentage of industrial service facilities in its industrial market. It’s still less than 10% of the overall industrial market, but it’s more in the 7% or 8% range. Why? Houston has always been an oil-industry area. The oil industry relies heavily on industrial support and storage for the different equipment that goes into drilling and producing wells.
Are you seeing a slowdown in investment sales in this niche?
Salazar: The whole industrial service facility market has slowed down because of higher interest rates. Look at a market like Fort Worth, Texas. That is a mega industrial market. Investment sales in the industrial service facility submarket here has slowed significantly, too. There are several reasons for this.
We are heavily tied to the transportation industry. That industry right now is in its 24th month of a major recession, with no sign that it is going to change dramatically during the rest of the year. During the last year, many of the smaller independent trucking companies started to fall by the wayside. Now even the bigger companies are reporting reduced earnings and higher expenses. That trickles down to us. Our tenants are going bankrupt and going out of business. They don’t have the resources to hang in there any longer.
One of the mantras of the transportation business had been to survive until ’25. Now we’re not sure if 2025 will be any better than 2024.
The other reason for the slowdown in investment sales has been because interest rates are so high. That will continue to be a problem until those rates finally start to fall.
The last major hurdle we face is that the spread between what sellers are asking and buyers are bidding for properties is still pretty significant. There is still a long way to go before the buyers and sellers get close enough to make deals happen again on a regular basis. The bid and ask spread is too wide right now. It is hard to make a deal that is comfortable for both parties. It’s not impossible. Some deals are still happening. But they are not happening at the same pace as they were in 2019, 2020 and even 2022. It started slowing in the middle of 2023.
How are you and your company getting through these slower times?
Salazar: You have to get leaner with your organization. It has to be as lean as it can get. You also have to be very careful with the opportunities that you chase. In the middle of last year, we switched from a rent-growth strategy to an occupancy maximization strategy. We haven’t raised our rental rates in most of our markets. We have actually cut our rates in some. We did this in Dallas-Fort Worth to increase our occupancy. That’s how you must do it. You maintain a lean operation and hope that you have some rent flexibility so that you can lower rents when you need to.
You mentioned that you also manage industrial service facilities in the Memphis market. How is that market performing today?
Salazar: It has been slow, too. It’s not because there is an oversupply of facilities in Memphis. It’s a strong transportation hub. What we are seeing there is entirely because of the recession in the transportation industry. We opened a yard there earlier this year, in February. Leasing has been slow so far. We have had a lot of companies looking. But we have not yet landed a major tenant. We have some small tenants. But our yard is 38 acres. That is a big yard. We’re hoping to land some major tenants soon.
But long term, we believe that Memphis is a growth market. We feel the same way about South Florida. We have a 60-acre yard under construction south of Miami. That will be ready for occupancy in late December of this year. We are very confident that this property will do well. But it will probably take us 18 months to get that yard into the 90% occupancy range. We have high hopes for our new Memphis yard, too. We should have more than 50% of the land there leased by the fourth quarter.
Do you think more investors and companies will get into the industrial service facility niche, especially once real estate sales activity starts picking up again?
Salazar: I think this sector will stay active. You have enough institutional awareness now that I believe that industrial outdoor storage and service facilities will be part of every institution’s investment strategy. It might continue to be a small percentage of their portfolios, but it is not going away.
