THOUGHT OF THE WEEK

Where Does the Money Go? Understanding IOS CapEx Drivers

When evaluating Industrial Outdoor Storage (IOS), one of the biggest misconceptions is that it's just another form of industrial real estate. But unlike traditional warehouses, where the bulk of the investment goes into constructing a building, IOS is all about the land and the yard.

Let’s dive into what are the main drivers of Capital Expenditures in IOS. 

1. The Breakdown: Land vs. Building

In a typical industrial development, construction costs—steel, concrete, HVAC, and interior build-outs—often account for 60-80% of total project costs, with land representing the smaller share. In IOS, this dynamic is flipped. The land purchase and yard improvements can make up 60-80% of the total investment, with buildings playing a much smaller role.

This shift in cost allocation makes IOS a unique investment category with its own set of fundamentals. Rather than maximizing building coverage, the key to IOS is optimizing the yard for durability, accessibility, and security.

2. What Drives Costs in IOS?

The highest expenses for an IOS site don’t come from walls and roofs but from the ground up. Key cost drivers include:

• Paving & Surfacing – Heavy-duty asphalt, concrete, or compacted gravel to support trucks and equipment.

• Drainage & Stormwater Management – Proper grading, retention ponds, and drainage systems to prevent flooding.

• Security Infrastructure – Fencing, gates, lighting, and surveillance to protect high-value assets.

• Access & Infrastructure – Curb cuts, ingress/egress, and road improvements to support industrial users.

3. How This Affects Investment Strategy

Understanding where the money goes in IOS investments leads to smarter decision-making:

• IOS sites retain most value in the land, not in structures. This reduces risks related to building depreciation or functional obsolescence.

• Conversions from traditional industrial to IOS are challenging. Most warehouses prioritize building footprint over usable yard space, making repurposing difficult.

• Zoning and entitlements are crucial. Since IOS is primarily land-driven, the ability to operate under the right zoning regulations is a make-or-break factor.

• Proactive maintenance is critical. Neglecting yard upkeep can quickly deteriorate the site's value and tenant desirability.

Final Thoughts

The IOS market is still evolving, but one thing is clear: its value proposition is fundamentally different from traditional industrial real estate. For investors and operators, recognizing that most of the capital goes into the land and yard improvements rather than buildings is key to making informed decisions.

Successful IOS investments require not just strategic acquisitions, but also diligent maintenance, OpEx, and CapEx planning. Whether you're acquiring, developing, or repositioning an IOS site, focusing on location, zoning, and yard usability will be critical to long-term success. As institutional capital continues flowing into the space, understanding these cost structures will set apart the best investors from the rest.

What do you think? What are the most important CapEx items or cost drivers for IOS sites? Reply to this email—we’d love to hear your take.

SPONSOR SPOTLIGHT
Surface Tech

Surface Tech helps IOS owners reduce CapEx and OpEx and extend the life of your biggest asset — pavement. Their tech-driven solutions are built to save you time and money over your hold period.

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