The Next Institutional Frontier Is Industrial Outdoor Storage
With limited supply, low vacancy rates and far less upkeep than traditional warehouses, industrial outdoor storage is an asset class that’s go for liftoff.
What they used to call “back-office” properties, industrial outdoor storage (IOS) space is now a $200-billion asset class that’s firmly on the radar of institutional investors.
The demand for the diminishing number of IOS lots, clustered around US cities, that are zoned to permit outdoor storage is skyrocketing.
IOS lots are being used as storage facilities supporting e-commerce, infrastructure, construction and logistics businesses, storing everything from equipment and vehicles to stacks of containers. They’re typically zoned to restrict any building from covering more than 25 percent of the property. Rental prices are set by the acre instead of SF.
Industrial market experts believe that the IOS market, currently a highly fragmented segment largely devoid of institutional ownership, is on the cusp of becoming a major asset class for institutional investors, with a growth trajectory that could match the rise of BFR in housing.
“They’re not creating more land for outside storage. In most cities, nobody wants to see more outside storage,” Rob Kossar, vice chairman at JLL who oversees the company’s industrial division in the Northeast, told GlobeSt.
“It’s zoned out everywhere, so wherever it exists, it’s super-valuable. That’s why institutional investors have suddenly woken up (to IOS),” Kossar said.
During the unprecedented shortage of vacant industrial warehouse space in US markets, investors who in the past five years have focused on newer, more “pristine” industrial spaces are now willing to consider these older urban IOS lots, he added.
A heavyweight fight for hegemony in the IOS market is shaping up between Alterra and JP Morgan Chase.
Alterra, which owns 100 IOS properties in 27 states, is launching a $1.5B expansion to defend its leadership in the sector. Alterra is targeting IOS space from 5,000 to 100,000 SF on 2 to 30 acres, with deals between $5M and $20M.
In a recent interview, Alterra’s CEO said the investment is a “multi-decade bet” on the growth trajectory for the value of IOS properties.
Zenith IOS, launched last year as a platform aiming for low-coverage industrial sites for tenants seeking outdoor sites, recently formed a $700-million venture with JP Morgan Chase that will acquire urban infill industrial locations in major cities.
Because IOS are clustered around major cities, the properties are suited for institutional aggregation. The infill nature of IOS properties, along with typical industrial zoning restrictions, limits the supply of IOS space and assures constant demand from a loyal tenant base, resulting in bigger residual values than other industrial properties.
With options for new warehouses with adequate vehicle parking increasingly limited in urban areas, the acreage available at IOS sites increases in value.
Industry analysts see the IOS sector consolidating over the next five years, similar to what has happened in the self-storage sector. In terms of value, IOS may soon overtake cold storage as a growth sector, drawing more attention from institutional investors.