On an 80-acre site in Cecil County, the first cars in a planned delivery of 10,000 vehicles have started arriving at a newly created industrial outdoor storage (IOS) facility. Developed by Greenspring Realty Partners, the Insurance Auto Auctions facility demonstrates both the continued high demand for IOS space in Maryland and the need to create IOS in new locations.

Two years of a pandemic-induced e-commerce shopping boom spurred extraordinary growth in Maryland’s IOS market. That activity now appears to be leveling out somewhat, but at a high level.

In Cecil County, Greenspring Realty Partners recently completed an 80-acre, industrial outdoor storage facility to hold inventory for an auto auction company. It is the first phase of a 400-acre IOS development. Photo courtesy of Greenspring Realty Partners.

“I think the sector was growing at an unsustainable pace during the pandemic. That curve is finally flattening out. The market seems to have found the right growth pattern,” said Toby Mink, Executive Vice President at CBRE. “Demand is still really strong, but it is down 20-25 percent in the last year. Rents, however, are up by 70-75 percent since the beginning of the pandemic, which is an incredible, astonishing number.”

The 2020-21 growth in IOS was driven by surges in both online shopping and investor interest in the property type.

“After the pandemic started, suddenly we heard an announcement that JP Morgan was going to back an industrial outdoor storage group, Alterra, with $250 million,” said Dan Flamholz, Principal at Greenspring Realty Partners. “Then, it was almost like a domino effect. Other major capital institutions started committing half a billion dollars or $750 million. Almost overnight, it went from an asset class that was never touched by institutions because it was a little bit dirty and might have environmental issues to become a darling among real estate investors… Market research now shows that industrial outdoor storage is a $200 billion asset class now. All of that happened in a a two-year timeframe.”

Greenspring had entered the Central Maryland IOS market well ahead of the pandemic. In 2017 when Baltimore City rezoned many industrial properties to allow residential or mixed-use developments, Greenspring began purchasing some of the remaining heavy industry sites.

“Baltimore historically has been an industrial market with major port activity and access to I-95. That would continue to drive demand for industrial land,” Flamholz said.

The flood of private capital into the market beginning in 2020 created heavier competition and higher prices for industrial sites. A 10-acre property which Greenspring had purchased pre-pandemic for $2.5 million, sold for $6.7 million. A 30-acre site, bought at the outset of 2020 for $3 million, sold for $10.3 million just two years later.

While those prices generated profits, they also created a new challenge for investors in IOS.

“In Maryland, there were some sites purchased recently where the investors paid a substantial amount per acre and they were not able to achieve the $10,000 per acre per month triple net lease deal they expected, so they have to refine their financial model,” Flamholz said.

Shortage of available land and increased lease rates for existing IOS are also pushing investors to look for land further from the port.

“A lot of tenants have gotten priced out of the port market so they have implemented new strategies for their transportation and logistics,” Flamholz said. “That is creating opportunities for pockets of land surrounding the port. People are looking out the Route 40 corridor and shifting into northern Baltimore City and Baltimore County and Harford County. It is helping those secondary and tertiary markets realize some port-related business.”

Both Frederick and Hagerstown are picking up some IOS activity, and “Cecil County seems to be the next frontier for IOS along the I-95 corridor,” Mink said. “There is a family that owns about 10,000 acres up there. That supply will slowly come onto the market over the next couple of decades.”

Meanwhile, demand for IOS space in Maryland is expected to remain strong long term.

“Even though demand has slowed a little recently, we are a port-centered region with one of the fastest growing industrial markets in the country and our rents have grown faster than most submarkets in America,” Mink said. “We see a lot of capital coming into the market with an appetite for industrial because we have really good rent trajectories here.”