IllinoisIndustrial Industrial service facilities are the new must-have for your portfolio Matt Baker July 23, 2018 Share on Facebook Share on Twitter Share on LinkedIn Share via email What if there was an industrial property type with a lower vacancy than the overall asset class, catering to mature and stable tenants, that was projected to increase in value? There is and it further benefits from—but does not rely solely on—e-commerce-driven growth. Industrial service facilities (ISFs) are mission-critical properties used to store, maintain or dispatch heavy equipment or bulk materials. They are primarily occupied by companies engaged in the transportation industry, everything from school bus companies to national trucking firms. ISFs can serve as container yards, trailer drop yards or event to collect surplus trailer chasses. Any firm with a large fleet, such as utilities or companies with field technicians, may also use these sites. They can also house bulk materials, such as roofing supplies, stone or construction materials. Essentially, these are low-FAR, single tenant industrial sites. They occasionally have limited utility infrastructure in place, making them expensive to convert to a higher use. But with the impact that transportation and logistics are having on the real estate sector, these sites are beginning to have an outsized role. For the most part, ISF tenants are long-term users. “There are a lot of 10-year leases, particularly with equipment rental companies or dealers,” said Tom Barbera, CEO of Industrial Outdoor Ventures. “Those guys generally settle in for a long time.” Last year, Barbera—along with fellow industrial real estate veteran Joseph Voet, who serves as the firm’s CFO—launched the Chicago-based Industrial Outdoor Ventures (IOV). The company is the only national real estate investor specializing exclusively in outdoor storage facilities. The industrial market overall is enjoying low vacancy right now at about 5 percent. But ISF availability is even tighter, with a 3 percent national vacancy on average. Even though the tenants that these facilities serve are in fairly mature industries without rapid growth, they benefit from good supply-demand fundamentals because of zoning restrictions. “The redevelopment that occurs where the supply of these types of facilities are located is flat to diminishing in an environment that is steady to increasing,” said Barbera. The company has been collecting ISFs around the country, building an investment-grade portfolio. If a redevelopment opportunity were to arise for a higher, better use, Barbera said they would be willing to entertain offers. But prospecting is not the final goal. “If we end up with a covered land play as an aside, that’s fine. But that is not our overall strategy,” Barbera said. “We don’t underwrite the deals with that in mind.” IOV currently has a handful of properties under control in Colorado, Georgia, Illinois and Texas. One of their two Illinois locations, at 23264 Youngs Road in Channahon, is fairly indicative of the acquisitions they like to make. A container/truck storage facility sited on 18.9 acres, the property has one building, an 8,600-square-foot office/workshop with 18-foot clear height. The property could best be used as a truck terminal, container stacking yard, bulk material storage or as a contractor/equipment storage facility. In close proximity to both the BNSF and UP intermodal facilities, the property is also within 2.3 miles of I-80 and 1.3 miles of I-55. There is enough greenfield space left in the I-80 Corridor that these not-quite-adjacent distances from highway makes the property less likely to be targeted by developers for a new, Class A fulfilment center or warehouse; it is an excellent fit for the support and storage capabilities of an ISF, however. When looking for properties, infill location is important, but two main criteria are zoning and FAR. Zoning in place that allows for either heavier transportation use or the storage of equipment or bulk material is the first standard, followed by an FAR of between 0.15 and 0.25. That said, they are open to lobbying for a variance if other factors are in place. For example, Barbera and Voet have been eyeing a 63-acre piece of land in Atlanta that doesn’t have the right zoning because the prior user, an equipment auction firm, moved out and with them went a special use permit. With no city sewer or water, the site wouldn’t support a new, high-end industrial building without added capital outlay, but it would be great for an industrial service facility. “So we will rezone, but we don’t like to do too much of it because it’s time consuming and we can get pushback,” Barbera said. “But we’ll pick our spots where we think we can succeed in rezoning.” As single-tenant, triple net lease properties, ISFs have the potential to bolster any portfolio. The users are mature and stable and the increasing performance of logistics-related real estate means that these property types will only trend upward.