A yard costs a fraction of a building to deliver, but almost all of that cost is land. Which scheme earns more on the money spent comes down to one input: what the land cost.
It depends almost entirely on what the land cost. On an illustrative 2.0 hectare site bought at $250 per m², a yard let for outdoor storage yields 4.06% on total cost against 6.00% for a warehouse built on the same land. The two yields cross at about $109 per m² of land: below that, industrial outdoor storage earns more on the money spent; above it, the building does.
Worked in full in Logistics and Industrial Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Industrial outdoor storage, or IOS, is land let as a secured yard for trucks, trailers, containers, plant and building materials, usually with a small office and workshop. It has attracted investors because it is cheap to deliver, lets quickly and needs almost no capital expenditure. All true, and all beside the point if the land is expensive. A yard earns rent on the whole site at a low rate per square metre; a warehouse earns a much higher rate on half the site. The arithmetic below compares them on identical land.
| Input | Outdoor storage | Warehouse |
|---|---|---|
| Site | 20,000 m² | 20,000 m² |
| Land price | $250 per m² | $250 per m² |
| Lettable area | 90% of site, 18,000 m² | 50% site coverage, 10,000 m² |
| Works or build cost, all in | $55 per m² of site | $900 per m² of building |
| Rent | $14 per m² of yard | $90 per m² of building |
| Works or build period | 4 months | 12 months |
| Letting void after completion | none | 6 months |
| Finance cost on land and works | 6% | 6% |
Land: 20,000 m² × $250 = $5.00m for both.
Yard: works 20,000 × $55 = $1.10m. Finance: land for four months, $5.00m × 6% × 4/12 = $100,000, plus works drawn evenly, $11,000. Total cost $6.21m.
Warehouse: build 10,000 × $900 = $9.00m. Finance: land for the 18 months of build and void, $5.00m × 6% × 1.5 = $450,000; build drawn evenly over 12 months then carried through the void, $9.00m × 6% × (0.5 + 0.5) = $540,000. Total cost $14.99m.
Yield on cost = rent ÷ total cost. In Excel: =Rent/(Land+Works+Finance).
Yard: 18,000 m² × $14 = $252,000 a year. $252,000 ÷ $6.21m = 4.06%.
Warehouse: 10,000 m² × $90 = $900,000 a year. $900,000 ÷ $14.99m = 6.00%.
| At $250 per m² of land | Outdoor storage | Warehouse |
|---|---|---|
| Total cost | $6.21m | $14.99m |
| Land as a share of cost | 81% | 33% |
| Rent | $252,000 | $900,000 |
| Rent per m² of site | $12.6 | $45.0 |
| Yield on cost | 4.06% | 6.00% |
The yard is cheaper to deliver by a factor of 2.4, but it earns $12.6 per m² of site against $45.0. With 81 per cent of its cost in land, the yard's yield can never exceed its rent per m² of site divided by the land price, $12.6 ÷ $250 = 5.04% before a single dollar of works, and that ceiling is low.
| Land, $ per m² | Land cost | Yard yield on cost | Warehouse yield on cost | Yard minus warehouse |
|---|---|---|---|---|
| 75 | $1.5m | 9.54% | 8.05% | +149 bp |
| 100 | $2.0m | 8.00% | 7.68% | +32 bp |
| 150 | $3.0m | 6.04% | 7.03% | −98 bp |
| 250 | $5.0m | 4.06% | 6.00% | −195 bp |
| 400 | $8.0m | 2.72% | 4.93% | −221 bp |
The crossover is the useful number. On cheap land at the edge of a town, outside a planning zone that would allow a building, or on a site too irregular for an efficient warehouse, the yard wins. On land priced for warehouse development it cannot, unless the yard rent is far higher: at $250 per m², matching the warehouse's 6.00% needs a yard rent of $20.7 per m², not $14.
Capitalise each rent at an illustrative market yield, 5.5% for the yard and 5.0% for the warehouse, reflecting shorter leases and lighter covenants on yards. At $250 per m² of land the yard is worth $4.58m against a cost of $6.21m, a loss of $1.63m. The warehouse is worth $18.00m against $14.99m, a profit of $3.01m, or 20.1 per cent on cost. Buying warehouse land to run it as a yard is a land bet, not an income investment.
The common error is comparing the yard's yield with the warehouse's on different bases: the yard on its works alone, the warehouse on land plus build. A yard on land already owned is a very different proposition. If the land is held anyway, awaiting planning or a pre-let, the $1.10m of works earns $252,000 a year, 22.9 per cent on the incremental spend, and the yard is an excellent interim use. The mistake is carrying that interim logic into a purchase price: an investor who pays $250 per m² because yards "yield over 20 per cent" has measured the return on the fence and the tarmac, not on the site. How much land a warehouse of a given size needs, and why coverage drives the comparison, is worked in how much land a warehouse needs; the build cost side is in what a warehouse costs to build per square metre.
Rule of thumb from the arithmetic: the yard's yield on cost is always below its rent per m² of site divided by the land price per m². If that ceiling is already below the warehouse's yield on cost, build or sell to someone who will.
Outdoor storage beats a warehouse on cheap land and loses on expensive land, and the crossover can be calculated before anyone argues about the market. On these inputs it sits at about $109 per m². The book's own workbook on development and the letting decision is among the free workbooks for this case.
Enough to match the warehouse's yield on its own, much smaller, cost. On the illustrative site at $250 per m² of land, the warehouse yields 6.00% on cost; the yard, costing $6.21m on 18,000 m² of usable area, needs $20.7 per m² a year to match it, against the $14 assumed. Rent on a yard is quoted per square metre of land, so compare it with warehouse rent per square metre of site, $45.0 here.
There is no building to fund. Surfacing, drainage, fencing, lighting and a small office cost about $55 per m² of site in the illustrative case, $1.10m in all, against $9.00m to build a 10,000 m² warehouse. The yard lets in four months with no speculative void. But land makes up 81 per cent of the yard's cost against 33 per cent of the warehouse's, so the yard's yield is far more exposed to the land price.
Often, because the comparison then changes. If the land is held anyway for a future warehouse, the yard's works of $1.10m earn $252,000 a year of rent, well over 20 per cent on the incremental spend, while planning or a pre-let is pursued. The case against it applies only when the land is bought specifically for outdoor storage at a warehouse land price.
This article is one calculation from Logistics and Industrial Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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