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Industrial Outdoor Storage Can’t Be Boxed In

Its growth is now running ahead of a commercial real estate industry trying to institutionalize it 


In 2021, veteran developers Ben Atkins and Daniel Laub founded Zenith IOS, a vertically integrated platform dedicated to compiling one of the largest portfolios of industrial outdoor storage (IOS) properties in the U.S. To date, Zenith, in a joint venture with J.P. Morgan Asset Management, has acquired roughly 50 properties with a combined asset value of over $600 million.

Atkins and Laub formed the company after noticing some very promising supply factors.

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“Even though industrial land prices were growing rapidly because a lot of people were building industrial development, there was a shortage of supply of industrial-zoned land for users who required a large amount of space,” said Atkins, Zenith’s CEO. “Therefore, rents for industrial land had outpaced sale prices. So there was an opportunity to build a portfolio of outdoor industrial yards leased at attractive returns.”

Zenith is far from the only company reaching similar conclusions of late.

Alterra IOS, the IOS division of Alterra Property Group, has developed or acquired over 200 properties across more than 30 states with an aggregated value over $2 billion since its 2016 formation, including acquiring over 130 properties at an average sale price of $8 million over the past 24 months.

Catalyst Investment Partners was formed in 2021 by Dan Haroun and Max Heiden, private equity veterans who recognized an opportunity in IOS, but who also understood that the nature of the properties required a dedicated effort.

“We both thought this sector was very special and interesting because if you’re in the right locations for the IOS properties, you have a really special lack of supply created by zoning restrictions that exist in core infill industrial locations,” said Heiden, who adds that Catalyst is approaching $500 million in gross asset value over more than 50 IOS properties along the East Coast. “That creates a really special rent growth story.”

Atkins’s and Heiden’s comments begin to illustrate the unique opportunity inherent in the IOS sector. For one, it’s that rare asset class generally unwanted by the municipalities it resides in as these sites carry little aesthetic or community function and generate little tax revenue. This makes zoning issues a potential impediment to successful operation — but it also constrains supply, which suppresses potential competition and keeps rents high.

The other factor limiting supply and leading to greater potential value is simply the lack of available land.

“If I have an outdoor industrial storage facility in a densely populated area, investors see an opportunity where it’s hard to create competitive product because there simply isn’t land available to create it,” said Al Pontius, senior vice president and national director of office, industrial and health care for Marcus & Millichap (MMI). “Furthermore, getting the zoning for it is difficult because communities aren’t all that interested in it, [because] industrial outdoor storage is not terribly attractive. So, as an investor, when I’m looking at close-in, high-density metropolitan areas, I’m looking at a big limitation on any kind of supply risk. Therein lies the primary reason that the asset class is so attractive.”

It helps explain not only the inventory growth but also the investment and financing underlying it.

“There’s plenty of capital flowing into that space. It seems like the hottest asset class in the country right now,” said Justin Horowitz, a commercial mortgage broker at Cooper Horowitz Real Estate Financing who has executed over $500 million in IOS financing. “There are plenty of tenants in the space that need to park trucks or equipment where it’s mission critical to their business. Lenders are seeing that and saying, ‘This isn’t just a piece of land that we’re valuing and lending on. This is a cash-flowing asset with a real tenant and a great lease.’ ”

But part of the reason these companies and others have jumped in aggressively is also the chance for early domination of a hot new trend. While the concept of IOS spaces isn’t new, demand for them has jumped so quickly in the past few years that what was generally viewed as just one subsector within the industrial category is now seen by many as its own new and rapidly evolving asset class.

“The biggest thing is that it’s a new space. Not everybody understands it,” said John Huguenard, industrial group leader and senior managing director at JLL (JLL), which in February announced a sale it arranged for a three-property, 23.15-acre,
1 million-square-foot IOS portfolio in San Bernardino and Rialto, Calif.

“It’s kind of hard to source the deals,” said David Perlman, a managing director who heads the New York office for Thorofare Capital. “It’s not an asset class that’s institutional. There’s a lot more entrants into the market and funds are being raised, but they’re not the easiest deals to source because not many people understand the product. Brokers don’t necessarily understand it, and appraisers are beginning to, but for a while they haven’t.”

An April 2023 report by research firm Green Street titled “Industrial Outdoor Storage: A Beautiful Ugly Duckling” defines IOS simply as “a land site zoned for an industrial use where the tenant can store something outside.” The report notes that most IOS sites have a small building on premises, that typical sites range from 2 to 10 acres, and that the building-to-land ratio is generally less than 10 percent.

Delving deeper shows that, given the newness of the idea of IOS as its own sector, there are still widespread disparities in how it’s viewed, making it a challenge to properly evaluate.

One strong illustration of this is that prominent players in the space don’t even agree on whether IOS is its own asset class at this point, or still a subsector within industrial. Heiden, for example, strongly believes the former; Huguenard, the latter.

When asked about the current size of the IOS market, Vince Tibone, a managing director at Green Street and head of its U.S. industrial and mall research, noted that it depends on a company’s definition of the sector itself.

“That’s a hard question to answer because it depends on one’s definition of what’s institutional quality,” said Tibone, author of the Green Street report. “Green Street’s view is the type of product near seaports or key supply chain nodes, such as intermodal facilities, is a much smaller potential universe, and I think that’s where most institutional capital, and some of the new platforms that have come up in the IOS space, are focusing their efforts. When you start going out to outdoor bus storage facilities in rural America, sure, that’s industrial outdoor storage, but is it really institutional? So we opted not to provide a total addressable market for the space because there’s a wide range of possible answers.”

Given that this level of uncertainty pervades the sector, a large IOS play requires a mechanism for compiling data almost from scratch.

“Because this is a new asset class, there’s not a lot of historical data. There really is no CoStar for IOS. So you build your database of rent on a deal-by-deal basis,” said Brooklyn-based Zenith’s Atkins. “The IOS comps for sales and rentals reside in the Excel spreadsheets of the three or four largest operators in the state, of which we are one. What we’re increasingly doing is looking at macro data, demographic trends, household median income, population growth, and population density on a city or even micro-neighborhood level to try to identify trends. We try to position ourselves in the path of progress by identifying where we think people are heading, and where, as a result, we think our individual assets will experience the highest rental growth.”

This lack of central data has resulted in a chasm of uncertainty regarding rents and comps.

“I could call someone who owns 10 million feet of industrial and say, ‘What are the IOS rents in this market?’ And they would have no idea,” said Heiden. “Because you only know the rents if you’re in this category and you do it every day.”

“We spent a good portion of 2023 putting together a comp database for both leases and sales,” said JLL’s Huguenard. “The hardest thing in this business is finding comps, because they’re [often] not advertised whatsoever, and each piece of real estate is so much more unique in the IOS space than for a traditional industrial box. A 250,000-square-foot building is the same everywhere. These are not the same. So it’s very difficult to get your hands on [comps].”

Tibone said that, at this early stage for the asset class, Green Street believes IOS properties are being largely underpriced by investors, especially since the barren nature of the land leaves open numerous options for future redevelopment.

“There are little or no buildings on the sites and they have a very low capex burden, which helps greatly in the total return profile,” said Tibone. “We also think the land option is mispriced to some extent. Most players are underwriting this as outdoor storage in perpetuity, but industrial property prices appreciate [because] land appreciates over time while buildings depreciate. The embedded option to potentially develop the site five or 10 years from now, we think, is fundamentally mispriced, and provides a valuable option to develop it into a Class A logistics [facility] should the economics pencil.”

Another challenge to a company’s efforts to dominate the IOS asset class is deal size: the 2 to 10 acres per deal cited by Green Street.

“The biggest obstacle is deal size,” said Huguenard, who noted that JLL’s IOS deals generally concern aggregations of at least $100 million. “How do you aggregate when these are $5, $10, $15 million deals? You need a group that’s willing to spend the time to aggregate these.”

A recent Alterra deal is a solid example of this. In January, the company announced it had acquired for an undisclosed price the TruGreen Portfolio consisting of 17 properties that host 350,000 square feet of buildings on 44 gross acres across 14 states in cities that include Tampa, Chicago, Charlotte and Austin. TruGreen has committed to a long-term leaseback for the entire portfolio, guaranteeing Alterra reliable in-place cash flow.

Heiden notes that the average deal size makes the asset class too small for traditional private equity firms to concern themselves with, which was a significant factor that led him and Haroun to branch out on their own.

“It’s not so easy to attack the opportunity when you are sitting under the umbrella of a larger diversified real estate manager who wants to put out $50 million to $100 million in equity in any one given deal,” said Heiden. “So it made a lot more sense for us to start our own company that was a fully vertically integrated business. If you’re going to do this, you have to do it in a very dedicated way, where you really are the expert in this one product type. If you dabble in it, maybe doing one $5 million deal a year, it’s not really worth anyone’s time.”

Toward this same end, Heiden said that Catalyst established a fully discretionary capital source, allowing the company to maintain complete control.

“We’re set up in a series of fully discretionary private equity funds that allow us to retain all decision-making authority over acquisitions and investments, rather than having to go to some private equity partner,” said Heiden. “That’s absolutely critical if you’re going to be serious in this sector because of how many small transactions you have to do in a given year.”

But, for all the asset class’ challenges, the advantages are numerous and potentially lucrative, from the supply desert to the dearth of required expenses and investments long term.

“There is a growing demand because it’s not really high on the capex side,” said Huguenard. “Once you have the asphalt down and your yard fenced in, there’s really no additional tenant improvements.”

Huguenard believes that, as with many newish industries, the current surge in popularity will be followed close behind by consolidation.

“You’re going to see a consolidation in the industry the same as you’ve seen on all things industrial. There’s going to be three or four groups that will be the major owners,” said Huguenard.

At this early stage, Heiden believes that, whatever comes next for IOS, those building a strong early presence now will see compounding advantages as IOS continues to establish itself as a major stand-alone asset class within the commercial real estate industry. 

“We’re still relatively early on in the life cycle of this sector’s maturity,” said Heiden. “It will eventually mature and become more institutional, like other niche asset classes such as manufactured housing and self-storage. There’s a very strong moat that exists for some of the early leaders who have a large existing portfolio, which gives them access to information and owner relationships. So there are quickly compounding benefits to scale that make it increasingly difficult to crack into the sector the more it matures. The handful of companies that will likely become dominant players in the sector already exist.”