Tag Archive for: industrial outdoor storage

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Industrial outdoor storage (IOS) is emerging as an increasingly popular property sector among institutional and other types of investors.

Interest in the sector ramped up during the pandemic as space was needed for container storage to relieve backlogged ports. Estimates from the experts WMRE interviewed suggest that the U.S. IOS market, which represents a niche within the larger industrial asset class, ranges somewhere between $130 billion and $200 billion in value.

Zoned for industrial use, IOS sites typically house vehicles, construction equipment, building materials and even shipping containers on an interim basis and range in size from two to 10 acres, often including a small building. The sector has been referred to as a “beautiful ugly duckling” by Green Street’s Vince Tibone since the properties are just lots with storage containers and construction equipment that have delivered “exceptional” returns over the last three years and brought in more institutional investors for funds raising hundreds of millions of dollars to target IOS.

While the sector is not immune to the same forces that are affecting other property types in the current environment, Tibone said he remains bullish on IOS over the next five to 10 years. Investor demand for IOS has been buoyed by strong recent operating results, favorable long-term supply/demand dynamics and a minimal cap-ex burden with an option to use the land for a higher and better use at some future time.

IOS sites located in infill submarkets in particular can deliver risk-adjusted returns “that are superior to those available on most other commercial real estate investments, including traditional industrial,” Tibone said. However, the fragmented, non-institutional ownership structure of the sector today makes it difficult to invest at scale, he noted.

“IOS portfolios do not come on the market often and the best returns are likely available through one-off deals, where there could be operational upside left on the table from the prior owner,” Tibone said. “Those with the patience and wherewithal to aggregate infill IOS sites over time should be rewarded with robust total returns relative to other property types.”

Among investors that are currently raising funds and targeting acquisitions in the IOS marketplace is EverWest Real Estate Investors, a Denver-headquartered real estate investment advisor with $5.2 billion in assets under management, including in the industrial, multifamily, office and retail sectors.

EverWest operates open-end funds and three single–client accounts with industrial strategies focused on IOS. The average size of the deals it has completed ranges between $10 million and $25 million.

So far in 2023, EverWest acquired two IOS sites—39.6 acres south of Atlanta for $12 million and 4.12 acres in Miami for $12.5 million, according to John Maurer, EverWest’s senior managing director and head of portfolio management. In May, the firm also invested in an industrial asset in Carlson, Calif. that includes acreage that can be used for IOS.

Part of the appeal of the sector is that when U.S. industrial inventory tightens and rents rise, IOS sites rise in value as they become reliever locations for a wide range of logistics activity, Maurer noted. In addition, in a market where industrial assets are still often priced at a premium, with cap rates as low as 4.5%, an IOS site adjacent to such a traditional industrial asset will often sell at a cap rate that’s 50 basis points higher. Rental rates in the sector have also been rising by 3.5% to 4.0% a year, according to Maurer.

EverWest’s open-end fund, the Open End Diversified Core Equity Fund in the NFI-ODCE Index, has a target return of 10%. Like Tibone, Maurer noted that the IOS marketplace is less institutionalized than regular industrial and has more fragmented ownership.

“We think because it’s difficult to acquire these sites that are smaller, if you aggregate portfolios in a target market that there’s going to be a cap rate compression,” Maurer said.

As a result, EverWest aims to aggregate a number of acquisitions from different sellers to build up its IOS holdings. Over the past 12 to 18 months, the firm has invested about $200 million in the IOS sector and it hopes to double that volume in the next 12 to 18 months. EverWest is also planning to launch an enhanced fund with a higher return strategy in the near future that will have a significant IOS component, according to Maurer. The firm is hoping to build off its current investor base of public and private pension plans, foundations and endowments, insurance companies and financial advisors for the fund, Maurer said.

However, Maurer admitted that EverWest’s transaction volume is currently about 15% off what it was a year ago because the increase in interest rates has made the firm more selective in making new purchases.

“There are some compelling opportunities in the marketplace in terms of attractive return potential, given where rates are today versus they were 12 months ago,” Maurer said. “We always want to look at where pricing is going and take advantage of correctly priced opportunities. What we see is sellers ultimately capitulate and need liquidity, so they will sell at market-clearing prices based on our new model for interest rates in the current environment.”

Assuming a leverage level of 40% to 40%, EverWest’s investments can deliver gross returns of 12% to 14% over a seven- to 10-year period, Maurer noted. That would require a barbell approach of doing straight up five-year lease IOS deals, he said. There would also need to be some value-add component for redevelopment in its strategy. About 20% of the IOS marketplace is about adding a warehouse over time, Maurer noted.

Change Is Coming

In the meantime, the number of institutional players involved in the sector is growing. For example, Brooklyn-based Zenith IOS, a builder and owner of outdoor storage properties, has partnered with institutional investors advised by J.P. Morgan Global Alternatives, to buy hundreds of millions of dollars of IOS properties last year. In February, J.P. Morgan and Zenith IOS announced a $700 million joint venture to buy more IOS assets.

Another active participant in the marketplace is Alterra IOS, which is part of Philadelphia-based Alterra Property Group, a real estate investment and development company that, according to reports, made more than $850 million in acquisitions over the past year.

In its most recent announcement, dated June 22nd, the firm expanded its presence in Las Vegas by acquiring a six-acre site for $7 million—its third in the marketplace.

Alterra declined to comment on its current fundraising effort, instead referring to a public filing from the Ventura County Employees’ Retirement Association (VCERA). The filing contained a recommendation to commit $35 million from the pension fund to Alterra’s IOS Venture III fund. Alterra’s goal has been to raise $750 million for the fund targeting IOS properties, according to IPE Real Assets. A previous Alterra fund raised $524 million in 2022, exceeding the firm’s goal of $400 million.

IOS Venture III will target smaller, infill IOS assets operating on triple net leases. Part of the value proposition of these assets, according to VCERA’s filing, is that they are typically owned by single owner-operators and have escaped the attention of most institutional investors. Alterra also plans to leverage its in-house management and leasing expertise to pursue value-add strategies for the assets. The firm estimates that it will generate from 30% to 40% of its total returns through the assets’ current cash flow, creating annual cash flow yields of 6% to 8%.

The fund has an eight-year horizon, with two one-year extension options, and will offer a preferred return to investors of 9%, with a carried interest of 20%. The fund’s net IRR target is between 14% and 16%, with a leverage ratio of 65%.

In addition to VCERA, Alterra’s equity investors include other public pension funds, foundations, endowments, insurance companies and family offices, both domestic and foreign, according to Managing Director Matthew Pfeiffer.

“Investors are finding IOS an attractive proposition right now because, unlike with a number of other real estate assets, supply is structurally muted, with municipalities not being incentivized to add new zoned land for outdoor storage,” Pfeiffer said.

He also mentioned the attraction of low cap-ex.

“Beyond the favorable supply and demand dynamics, IOS also benefits from being a very low capital expenditure business translating into low frictional leasing costs to put new tenants in the space,” Pfeiffer noted. “Lastly, the tenant profile is largely credit and national, under a triple-net lease structure that further entices institutional capital’s interest in the space,”

According to BJ Feller, managing director and senior vice president at Northmarq, cap rates on traditional industrial properties have gotten so aggressive in recent years that institutional capital was looking for opportunities with a similar profile, but more attractive cap rates.

“Once they’ve been able to establish their credibility and track record in the segment, we’ve seen operators have great access to the capital sources who want to play in this asset class,” Feller said.

He added that while equity inflows to the sector have “cooled to a certain degree” on a year-over-year basis, they remain robust relative to other property types.

“Most of the decline has been a reaction to caution that cap rates may be going mildly higher and offer better acquisition opportunities in the months ahead,” Fuller said.

 

Source: Wealth Management

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With the trifecta of idling engines, diesel exhaust and the constant presence of 18-wheelers, industrial outdoor storage operators fight an uphill battle getting their projects approved by municipalities.

But rising demand — and the rising prices that come with it — has motivated developers to find ways forward despite community backlash.

Entitlement challenges, zoning difficulties and pushback from NIMBY-esque neighbors slow the production of IOS properties, causing developers to create strategies targeted at avoiding these pitfalls to get their deals done and meet a ballooning market need.

“The lack of available supply for truck terminals has historically been driven by local zoning ordinances,” said Cresa broker Eric Rose, who is based in Omaha, Nebraska. “Most communities aren’t friendly and won’t really add any more of these locations unless it’s via a case-by-case, special-use approval process, which is time-consuming and costly.”

As the continued growth of e-commerce and a renewed domestic manufacturing sector add pressure to expand trucking to handle increased logistics demand, some developers are striking out and figuring out how to add new capacity. With IOS vacancy rates slipping to 3% in 2022, according to Marcus & Millichap research, the need is clear. And with the high rents and sales prices being fetched by existing IOS properties, ground-up development can offer a significant payday, especially from interested institutional investors or truck carriers.

Earlier this month, Industrial Outdoor Ventures announced plans to turn the Twin Lakes Travel Park in Davie, Florida, 24 miles north of Miami, into a 38-acre industrial service facility. Situated south of Interstate 595, between State Road 7 and Florida’s Turnpike, the ground-up development will include two buildings totaling 227K SF and outdoor storage yards that can hold 280 truck trailers.

“This is another great opportunity for IOV to meet market demand by developing the type of modern facilities that today’s end users require and in a location that has a scarcity of land available for this type of asset,” Industrial Outdoor Ventures Senior Vice President of Development and Acquisitions Eric Johnson said in a statement.

Turnbridge Equities also just picked up a 3.6-acre site in Rancho Dominguez, California, near Los Angeles, in a $25.5M buy.

“The deal, another 2.49-acre pickup in the South Bay, aligns perfectly with our strategic vision of expanding our Industrial Outdoor Storage strategy in port-adjacent, infill and high barrier-to-entry markets,” a Turnbridge executive said in a statement.

In nearby Perris, California, Alterra IOS spent $8.5M on a 7-acre towing yard in early May, with plans to renovate it and reintroduce it as an IOS property with easy access to the busy Inland Empire.

Chicago-based Dayton Street Partners has been busy with redevelopments and plans to create new trucking facilities, one of just a handful of ground-up IOS developments taking place. The firm just finished a 95-acre terminal with 500K SF of industrial space at 5800 Mesa Road in Houston, which is being leased to the carrier Maersk.

The firm also has a 47-acre, 1,000-trailer terminal set to open in Baytown, Texas, near Houston and less than 20 miles from two Gulf ports, set to open in June. The terminal includes a 24-foot-tall, 1,382-foot-long building meant for unloading and reloading truck cargo. In addition, Dayton Street acquired two truck maintenance facilities in Atlanta with plans to renovate and reopen.

“The difficulties of finding appropriate space and building new facilities — often renovating existing industrial or vehicle-focused real estate, such as mobile home parks or underutilized warehouse sites with vacant buildings and minimal need for rehabilitation — means it often isn’t worth it to seek out real estate on the fringes of a market,” Dayton Street principal Howard Wedren said. “Financing has been rocky lately so it is difficult to get access to capital compared to those with longstanding client relationships.”

It is key to find locations near big travel hubs and ports, spots already in high demand for industrial developers seeking storage space.

“We don’t go to the outskirts,” Wedren said. “We’re very much into the high-barrier-to-entry sites. That’s our model, and we don’t deviate.”

High barriers are common for IOS projects. In Long Beach, California, the firm Cargomatic received city council approval for an IOS storage site last month near the busy Pacific port, just overcoming significant backlash by business groups and local leaders concerned about additional pollution from heavy trucks.

“There are no guarantees at the end of the day,” Cresa’s Rose said. “So do you go through a multiyear development process, not 100% certain that you’re going to get those rezoning and entitlements you need? Or do you just bite the bullet and buy the existing facility, and you can activate your service immediately upon opening the facility?”

In the case of Industrial Outdoor Ventures’ project in Davie, Director of Construction and Properties Rob Chase said the firm had good relationships with local leaders. It helped that the older travel park was showing signs of age and wear, and many in town were happy to replace the site with something newer.

Even with the support, it is a long process. Properly and fairly relocating existing residents is time-consuming, and even with the relatively simple construction requirements of these kinds of projects, it will still take 14 months of site work and construction once the site is cleared.

On the flip side, an empty site in Jurupa Valley, California, near the Inland Empire, that Industrial Outdoor Ventures acquired on the precipice of gaining approvals for construction in a portfolio purchase, now has to restart the entitlement process.

Chase said he sees the value of existing and new IOS facilities continuing to rise, spurring more developers to attempt more conversions, but he acknowledged that the process is often difficult.

“Having the right zoning is absolutely critical,” Chase said. “An entitlement process I describe as being long and drawn out is nothing in comparison to trying to change the zoning. That’s even more of a hill to climb. You could easily flip these properties, but pushing, sticking with it through to the finish line, is worth it.”

 

Source: Bisnow

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Industrial outdoor storage, or IOS, a new property type born of climbing costs for traditional industrial buildings, is rapidly becoming a darling of the more opportunistic investors in commercial real estate, with an estimated market value of $200B in the U.S.

There’s no hard-and-fast definition for what makes an IOS property, but this nebulous property type benefits from two major factors: its simplicity and its physical constraints. Its simplicity makes it easy to manage. Its physical constraints, further restricted by unfriendly zoning laws, give it an element of urgency: Either get on board now or miss the train.

Just as there’s no official name for the property type — it can be called industrial outdoor storage, industrial storage facilities or an industrial prop parking facility, for example — there’s no agreed-upon understanding of just how big this market is, or even what property types this market comprises. The same term can include truck yards, maintenance shops, storage lots for shipping containers, equipment rental and even empty lots near ports.

No matter what you call them, these properties are widely understood by investors to be an appreciating asset intimately tied to logistics and industrial sites, and one that doesn’t have much room to grow outward: Few cities and municipalities want to zone for and encourage additional truck yards.

So despite all the cloudiness, there’s clarity around the potential in buying up property with continued demand and little to no risk of significant added supply. This competition for assets could lead to a frenzy and rapidly appreciating prices, making it harder for users that need the spaces to pay rising rents.

As industrial rents rise in many markets, tenants continue to ask themselves if they can’t simply store containers or vehicles outside, Grossman said. Vacancy in IOS fell below 3% in 2022, per a Marcus & Millichap report, while rents have spiked 30% since the end of 2019, compared to 24% for industrial rents.

There may not have been a singular event that kicked off what has become a gold rush for IOS in recent months, but the industrial and logistics situation during the pandemic underscored the value of these somewhat liminal spaces. IOS’ ties to traditional industrial sites may also be a limiting factor; as the sector cools, so might demand for these assets.

There had been an intensified drive to store trailer trucks, containers and equipment, beyond longtime uses by shipping and construction. Then the need to store and supply during an intense build-up of industrial demand, as well as a push to acquire and build more last-mile delivery spaces and consolidate logistics operations as fuel prices rose, created a condition for white-hot rent growth in IOS.

Now, these spaces are seen as an inflation hedge, and deep-pocketed investors have been making significant moves to acquire larger and larger portfolios.

IOS spaces typically exist next to port, rail, airports or intermodal transport spots. This makes the map of valuable real estate more diverse: Los Angeles and Charleston, South Carolina, both with port access, as well as Indianapolis and Oklahoma City, with truck terminals and a central U.S. location, offer great assets and opportunities. Asking rents may be south of $9 per SF, but rents rose more than 12% in 2022, with forecasts suggesting the surge will continue.

They’re defined as low coverage, meaning less than 20% of the space is covered with a building, like a garage or storage space. Infill opportunities abound; Grossman leased a gated parking lot to an Amazon facility near his office in Tulsa for “more than what a building might cost,” all so the retail giant could store its vans.

Industrial Outdoor Ventures CEO Tom Barbera, who started as an industrial broker in 1993 and formed his current venture in 2016, said the fundamentals of the space have always been strong. Despite many of the tenants being national, publicly traded companies with great balance sheets, it has traditionally been overlooked because it’s not what Barbera calls a “brochure-quality industrial real estate.”

In 2021, Industrial Outdoor Ventures sold a $200M portfolio to Stockbridge. Since then, the Chicago-based firm has acquired a 78-asset portfolio worth $1B, and has plans to start expanding into the Southeast in the next year or so.

Several funds have focused on IOS specifically, partnering with large investment banks as a JV partner. Big names in the space, according to Commercial Property Executive, include J.P. Morgan Global Alternatives and Zenith IOS, which formed a $700M joint venture last February; Alterra Property Group, which closed its Alterra IOS Venture II LP with $524M in investments; and Criterion Group and Columbia Pacific Advisors, whose joint venture plans to deploy $2B by the end of the year.

With average deal size between $5M and $15M for a property, Barbera said, many of the larger investors may lack specific IOS strategies. They tend to rely on others to assemble portfolios for them to acquire, typically by buying out existing mom-and-pop owners. That’s one reason it has become such a regionalized, fragmented submarket. Expertise in the space, since it’s very niche, is often hard to come by, so lots of brokers and buyers come from retail and self-storage, which may be oversaturated, looking for the next big thing.

An industrial slowdown could begin to cool down the sector. But Pontius doesn’t see a chance of a true slowdown for IOS; even if demand for industrial significantly cools after the skyrocketing market of the last 12 to 24 months, the already increased supply of warehouses and shipping routes might actually make IOS even more sought-after as a means of handling increased logistics traffic. Worst-case scenario, investors can redevelop this space into more traditional industrial uses and find another high-performing valuable use, which in turn further restricts the supply of IOS.

 

Source: Bisnow

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The nine-acre truck depot in Kearny, New Jersey, wouldn’t appear to fit anyone’s definition of prime real estate.

The site is surrounded by a tangle of major highways that are often clogged with traffic, abuts a rail yard packed with clattering freight cars, and is just down the street from one of the most polluted landfills on the northern New Jersey waterfront.

To Andy Smith, a managing director at Brookfield Asset Management and the global head of its logistics investments, the parcel, located less than 10 miles outside of New York City, was as attractive as any of the top-tier properties his company owns. This past December, Brookfield paid a little more than $67 million to acquire the site at 1100 Newark Turnpike, which it plans to continue to operate as a terminal for trucks.

“I’m not sure if someone driving down the highway would look out and think, ‘Hey, that’s an immaculate truck terminal,'” Smith conceded. “But as crazy as it sounds, it’s fantastic real estate.”

Brookfield’s portfolio is still headlined by blue-chip real-estate assets such as the Manhattan West mixed-use complex in New York City, where major office tenants, like the law firm Skadden Arps, base their operations, and Canary Wharf, a similarly large-scale London property with a mix of office, retail, and residential space. But the development and investment firm, whose global real-estate portfolio includes $260 billion of property, has also amassed about $500 million — and counting — of industrial land sites across the country since 2018.

Brookfield is one of several big-name investors that are paying increasing attention to lowly industrial land. Recent buyers include the financial firm J.P. Morgan Asset Management, the private-equity players Fortress and Cerberus, and real-estate-focused investment giants, including Brookfield and the San Francisco-based firm Stockbridge.

Industrial land is used for a range of purposes, such as parking trucks and buses, storage for bulky equipment like cranes, cherry pickers, and bulldozers, and a place to stage heavy goods that can weather exposure to the elements including gravel, lumber, or shipping containers. The interest in industrial land reflects the growing recognition that these sites are as essential as they are ordinary, providing key infrastructure for the delivery of goods and services to large swaths of America.

Such land has been around for as long as the country has had heavy industry. What’s new is the rush of major investors who see a lucrative opportunity to corporatize a niche of the real-estate market that is still overwhelmingly owned by an array of small businesses and individuals. The segment has even been rechristened with a more sophisticated-sounding moniker: industrial outdoor storage, or IOS.

Investors estimate there’s at least $200 billion of industrial-outdoor-storage land across the country, a sizable enough market for years of investment to come. IOS sites have caught on as an unlikely institutional-caliber asset as other more established areas of the real-estate-investment market, like office buildings and retail space, have been upended by the growing popularity of working from home and online shopping.

There’s A Shrinking Supply Of Industrial Land  

Another factor that has helped ignite interest in this unheralded corner of the industrial market is the fact that outdoor-storage sites are a disappearing commodity, driving up rents and their value.

That’s especially true in northern New Jersey (just outside New York City), Los Angeles, the San Francisco Bay Area, Seattle, and other major cities across the country, where land is scarce, populations are large, and transportation infrastructure like highways, cargo ports, rail links, and airports abound. In these places, industrial areas have been whittled down for decades by demand to convert those districts to other uses, such as residential and commercial space.

More recently, a boom of warehouse construction has cut into the already-shrinking pool of outdoor-storage land. A record 446 million square feet of warehouse space was finished last year across the country, according to CBRE. The huge volume of new warehouse development has not only thinned the number of remaining outdoor-storage sites, but also created additional demand for it.

“Many warehouses just weren’t designed for the parking, storage, and staging requirements that come from the enormous throughput of goods traveling in these spaces today and the speed at which they’re moving,” said Matthew Pfeiffer, a managing partner at Alterra Property Group, which invests in IOS sites. “That has created increased demand for outdoor-storage needs that benefits us.”

Pfeiffer, for instance, said that Alterra, which was founded in 2017 in Philadelphia, is in the process of negotiating a lease for an 11-acre site in South Florida next to a new warehouse that was recently leased by a large shipping and logistics company. The shipping and logistics company, he said, realized its warehouse operations will require additional parking capacity on Alterra’s site. Pfeiffer said he couldn’t yet disclose the details of that transaction, including the location of the parcel or the identity of the players involved, because the deal is ongoing.

Investment In Industrial Is Just Taking Off 

Buyers of these parcels see a supply-and-demand imbalance that is likely to persist and generate profits for years to come.

“There’s only so much land that’s zoned for industrial uses,” said Dan Haroun, who cofounded the Manhattan-based IOS investment firm Catalyst Investment Partners in 2021. “And these municipalities aren’t going to create more of it.”

Outdoor-storage sites are different from many other real-estate assets in that they need little in the way of capital upgrades and maintenance to prevent them from becoming obsolete. Industrial land also generally has lower operating costs and taxes compared to other real estate.

Haroun said tenants pay a wide range of rents that often depend on the specific attributes and location of a site. IOS space can cost just a few thousand dollars per acre per month in smaller markets, he said, up to $60,000-$70,000 for well located sites in large, space constrained urban areas.

IOS sites are not always completely vacant, but are generally defined as having 30% or less of their land area covered by a building or structure. Brookfield’s Kearny truck terminal, for instance, has abundant parking, but also a long, narrow building that allows goods to be unloaded and transferred between truck trailers.

It’s Hard To Find Big Enough Portfolios Of Industrial Land 

There are challenges, too, in breaking into the business of owning industrial land.

Unlike Brookfield’s transaction, most IOS sites are under $10 million, investors said, making it work-intensive to amass portfolios of the dollar scale substantial enough to attract institutional capital.

Fortress has compensated for that by acquiring properties at a rapid rate, purchasing 80 properties in the past 18 months, “one of the fastest acquisition pipelines in the IOS market,” said Greg Pearson, a managing director at the firm who helps manage its IOS acquisitions. The investment firm has bought roughly $1 billion of outdoor-storage sites over the past two years in Los Angeles, the San Francisco Bay Area, and Seattle. Pearson said he expects the firm to “remain active,” buying up more IOS land in the coming year.

Others have found ways to buy at scale. Alterra, for instance, closed on an $86 million purchase of 14 outdoor-storage sites in December that were sold by the trucking company Heniff, which plans to continue to lease and occupy the properties. But Alterra has also built up its capacity to handle a larger volume of smaller IOS deals. The 75-person firm now has a 20-person investment team dedicated to IOS alone. It raised a $500 million fund for IOS investment in 2021 and is in the process of launching a follow-up vehicle that will be larger in size.

Catalyst, with a 10-person team, raised a $55 million fund in 2021 and is now raising a second fund that will be about $130 million, Haroun said. While the first fund was made up of mainly high-net-worth investors, the second will have larger-sized contributors, such as “pension funds and endowments,” Haroun said, a sign of the growing eagerness among institutional investors to partner with specialists who focus on IOS and can manage the transactional volume.

Zenith IOS, another outdoor-storage-investment firm that’s based in Brooklyn, struck a $550 million joint-venture deal with J.P. Morgan Asset Management in 2021 and is in the process of deploying that capital. So far it’s spent about $350 million of that and this year plans to use the remaining $200 million. Combined with financing, it expects to purchase roughly $600 million worth of IOS deals this year, Benjamin Atkins, the firm’s CEO and cofounder, said.

Atkins said he has been impressed by the robustness of the IOS market, even with fears about the broader economy. Zenith is currently in negotiations, for instance, to lease 8280 NW 80th Street, a three-acre site it purchased last summer in Miami for $9.1 million, to a logistics company that would use it for storage and vehicle parking.

“We’ve been looking for signs of weakness as other areas of commercial real estate slow down, but in IOS we’re not seeing it,” Atkins told Insider.

Zenith has such an appetite to expand its industrial-outdoor-storage portfolio that Atkins used Prologis, one of the world’s largest owners of warehouse space, as a benchmark for his ambitions.

“We want to be the Prologis of dirt,” Atkins said.

 

Source: Business Insider

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Industrial outdoor storage has gone from being a niche in the industrial sector often owned by small private investors and mom-and-pop operators to a market estimated at $200 billion.

During the past three years, IOS has been growing dramatically and increasingly attracting the attention of—and significant outlays—from institutional investors and private equity firms.

“There is a lot of institutional capital chasing deals right now in the IOS space and it’s happened very quickly. I have two or three new groups calling me every week that I previously didn’t know about,” Zach Harris, a director at Stan Johnson Co. based in Tulsa, Okla., told Commercial Property Executive. “They’ve got committed capital and they’re ready to spend it. There’s definitely a rush to acquire product as quickly as possible.”

The demand for industrial storage space increased during the pandemic as e-commerce exploded and continues to be a significant part of the supply chain as more businesses seek locations for last-mile delivery and also want to be near ports and major industrial corridors. This hot commercial property type is mainly used for truck terminals, trailer storage, container storage, pallet storage and construction or heavy equipment yards. Trucking and truck parking are the heaviest users, particularly by third-party logistics companies.

Some of the biggest players in the IOS subsector include J.P. Morgan Global Alternatives and Zenith IOS, which formed a $700 million joint venture in February to create a national IOS storage platform and are aiming to build a portfolio worth $1 billion within the next two years. They kicked off their joint venture with the acquisition of four facilities in Dallas, including a nearly 27-acre property at 2118 California Crossing about 1 mile from Interstate 35 and 10 miles from Dallas Fort Worth International Airport.

Alterra Property Group closed its Alterra IOS Venture II LP fund in March with $524 million in total commitments, well beyond its original fundraising goal of $400 million. Limited partners in the fund included public and private pensions, endowments and foundations, asset managers, family offices and high-net-worth individuals. Alterra was an early entrant in the IOS market, launching its strategy in 2016.

Also in March, investor and developer Criterion Group and Columbia Pacific Advisors formed a joint venture aimed at deploying more than $2 billion in capital in IOS properties across the U.S. by late 2023. The joint venture’s first acquisition was a 41-property portfolio covering 520 acres across 11 states valued at $360 million. In June, Criterion Group announced the acquisition of eight IOS properties totaling 151 acres for an aggregate purchase price of $45.3 million. Criterion’s IOS portfolio now has 50 properties in 13 states valued at $550 million, including its first purchases in North Carolina and Virginia.

In June, Iconic Equities, a Miami-based real estate investment and development firm focused on industrial assets, and Leste Real Estate U.S., the real estate investment strategy of alternative investment manager Leste Group, formed a programmatic joint venture backed by about $150 million in institutional capital to acquire $400 million of industrial outdoor storage facilities across the U.S.

Iconic Equities—formed about 18 months ago—made IOS investments a core focus within the last six to nine months after focusing initially on more traditional industrial acquisitions and development in markets like Charleston, S.C., and Phoenix, according to Founder & CEO Tim Bishop. In Phoenix, the firm is set to break ground on approximately 1.2 million square feet and acquiring an additional 110,000 square feet in a forward takeout structure, .

The joint venture partners are looking for sites ranging from 5 to 15 acres in top U.S. logistics markets including New Jersey; Atlanta, Dallas, Los Angeles; the Bay Area; the Inland Empire; Nashville, Tenn.; Columbus, Ohio; Savannah, Ga., and South and Central Florida.

Their first acquisition was the $9.5 million acquisition of Garnett Storage, a 5-acre storage site in Coral Springs, Fla., which is leased to nearly 300 tenants seeking outdoor storage for boats, trailers, motor homes and commercial vehicles. The joint venture recently acquired a 6-acre IOS site in Fontana, Calif., in the Inland Empire and has deals in contract in the Inland Empire, Los Angeles and Columbus.

“Warehouse development in super infill locations near ports and in the major MSAs that typically sacrifice parking spark demand for IOS sites that can provide parking for trucks as well as storage for containers and pallets,” Bishop told CPE.

The Iconic team uncovers the opportunities for the joint venture, establishes the deal flow and structures the deal flow while Leste focuses on the capital market side of the transactions.

“From an institutional capital perspective, the reason this has become such an interesting niche over the last six months and really the last several years is it’s under penetrated by the institutions.” Leste Managing Director Josh Patinkin told CPE. “That coupled with really strong fundamentals in rent growth and tenant demand for these types of assets has come together to create a growing niche.”

Chasing Yield

There’s another important reason IOS has become increasingly popular with institutional investors. They are chasing higher yield.

“This strategy affords institutional capital the opportunity for higher yielding investments when their two biggest apprehensions right now are cap rate expansion and interest rate risk,” Bishop said. “When you get higher yield, you’re kind of insulated from that.”

The IOS market is not quite as mature as other real estate asset classes. Many of the properties are still owned by mom-and-pop operators and deals can be off-market or represented by local brokers rather than national brokerage platforms, Patinkin said.

“It’s not a very liquid market,” Bishop added. “There’s a lot of inefficiency in pricing and in evaluating risk and return and it’s especially extenuated in IOS because they’re smaller opportunities, they tend to have less institutional ownership and less of a national brokerage presence.”

Bishop and Patinkin also noted there are high barriers to entry in IOS due to a limited supply and many municipalities frown on these kinds of properties and are not likely to approve new uses in their communities.

“It’s one of the very few strategies where you can say supply is decreasing because a lot of these sites are very infill and tend to get redeveloped into other uses like traditional warehouse and there’s only so many of these permits that are out there,” Bishop said.

The IOS submarket in the Denver region has been growing organically over the past three years with a focus on infill sites close to the city, according to Cushman & Wakefield director Joey Trinkle.

“It’s harder to find buildings with outside storage and lower coverage in a strategic location close to the urban core that is also close to major interstate access,” said Trinkle. “There is higher demand from both the end user and investor sides to finding locations closer in.”

Rising Rents

Similar to the industrial sector as a whole, rents have also been rising in the IOS space, where leasing is priced by the acre rather than square footage.

“A few years ago, we were seeing deals done for outside storage without a building on site for about $5,000 an acre,” Trinkle told CPE. “Now we see $6,000 per acre triple net, which really speaks to the value. Outside storage properties bring a unique mix of users, some are local trucking and transportation companies that are local to Denver. But we also see national credit corporations looking for strategic sites. That’s really who these investors are targeting.”

Trinkle and Managing Director Matt Trone are currently marketing a 27-acre industrial storage yard/trailer site at 409 W 66th Ave. in central Denver recently acquired by IG LogisticsImperium Capital’s industrial platform than owns and operates properties with large outdoor storage or transportation components, and Meadow Partners, an institutional middle-market real estate investor, for $19 million. IG Logistics launched last year with plans to invest $250 million in IOS properties and specializes in acquiring and developing infill assets in high barrier to entry, urban growth markets where demand for logistics real estate is driven by e-commerce, with a focus on last-mile facilities.

The central Denver property is a vacant lot that is zoned for outdoor storage and includes a 10,000-square-foot industrial building with about 6,500 square feet of office space, two drive-through service bays and 14 feet of clear height. It’s also situated near the confluences of I-76, I-25, I-270 and US 36 and near the BNSF Intermodal Facility and UP Intermodal Facility.

Trone described the former auto auction site as a “rare and very attractive piece of property” that can be divided down to three or four tenants, with options to share the building and office space, or some can just use the property for pure yard space.

In June, Trone and Trinkle and colleague Steve Hager represented a partnership of Biynah Industrial Partners and Platform Ventures in the $9.5 million acquisition of a 12.2-acre IOS property in central Denver from Prime Inc., in an off-market transaction. BIP, a Minneapolis-based private equity firm that invests in industrial real estate, and Platform, a Kansas City, Mo.,-based real estate investor and asset manager, plan to invest at least $150 million in IOS assets over the next two years.

The Cushman & Wakefield brokers are also marketing the property that has access to the major Denver highways and the two intermodal facilities.

“The previous owner was only using about 4 acres,”Trone said, “while the new owners plan to pave the unused land to maximize the space for interested tenants.”

They expect strong demand since development of infill locations over the past several years has displaced companies that need parking for trailers and heavy equipment.

“The renewal rate for tenants in the IOS sector is greater than traditional industrial properties,” Harris told CPE.

But they also tend to sign shorter leases, generally in the five- to seven-year range, which is attractive to institutional owners looking for value-add assets that will potentially see more frequent rent increases. With demand outpacing supply, owners also don’t need to worry about replacing tenants who leave. Triple net leases can often be found at IOS properties, where operating expenses in general are lower than traditional industrial properties.

Despite the increased investments in IOS in recent months, Leste’s Patinkin says the market is big enough to accommodate all the interested investors—at least for the next two or so years.

But Patinkin has advice for those considering investments in IOS: “You have to have really good access to capital because the credit markets are very young in IOS and there’s not a lot of participation yet. So, you have to navigate that. You have to be fairly deep pocketed and have support. You’re not going to get competitive individual small loans on an asset-by-asset basis. You have to know how to access the broader capital markets to navigate this strategy.”

 

Source: Commercial Property Executive