Tag Archive for: ios investment

,

Industrial Outdoor Storage Rises In Popularity Among Institutional Investors

industrial outdoor storage_canstockphoto7067322

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

Why Outdoor Storage Is The Hottest New Play In Commercial Real Estate

industrial outdoor storage_canstockphoto7067322

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