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By Bisnow.com

How Multifamily Developer Alterra Property Group Became A Big Player In A Niche Industrial Property Type

Plenty of commercial real estate companies operate in multiple asset classes, but few have a portfolio like Alterra Property Group.

The Philadelphia-based company, founded by managing partner and CEO Leo Addimando, had over a decade of experience developing multifamily buildings exclusively in Philadelphia when it entered the realm of industrial outdoor storage in 2016. Six years later, it has a national, institutionally backed portfolio of IOS properties, but is still a Philly-focused multifamily developer.

The catalyst for Alterra’s expansion was when Addimando’s friend Frank Bardonaro called on behalf of his company, Maxim Crane Works. Maxim was being forced to vacate a lot in Boston and Bardonaro was having no luck finding a new place to store cranes after a year of searching.

“After several failed attempts with some large national companies, I remembered that Leo spent a lot of time in the Boston area while attending Harvard, so I asked him for some help,” Bardonaro told Bisnow in an email. “He quickly responded, put us with some local contacts and we had multiple options within a month.”

Today, Addimando admits he knew little about Boston as a real estate market and even less about a little-known niche of industrial property. But Alterra’s acquisition of the site for leasing to Maxim led Bardonaro to realize the benefit of focusing more capital expenditure on his company’s vehicle fleet. In 2018, Alterra acquired 17 properties from Maxim across 12 cities in a sale-leaseback deal at the portfolio level.

“We didn’t really know what the endgame was at the time, but once we closed on that sale-leaseback portfolio transaction, we knew it wasn’t going to be just a single-tenant business,” Addimando said. “So we started searching for data on how big the market was and tried to create an investment thesis for it.”

At first, Alterra leaned on friends and family to help finance its acquisitions, eventually getting an investment from a family investment office. By December 2019, Alterra had formed a $300M joint venture backed by JPMorgan Chase to acquire IOS properties. Six months later, it secured a $100M credit facility with Morgan Stanley for the same purpose. Late last year, Alterra launched its first discretionary fund in partnership with New York-based Park Madison Partners. By mid-March, the fund had closed after raising $524M, well above its goal of $400M.

A Nashville, Tennessee industrial outdoor storage facility owned by Alterra Property Group and leased to Maxim Crane Works

Over that time period, industrial outdoor storage exploded in popularity as an investment target, enjoying both the relentless demand for logistics space in general and advantages specific to the property type.

“Supply of IOS is constrained for a few reasons,” said Matt Pfeiffer, Addimando’s fellow managing partner who runs the day-to-day operations of the IOS business. “There are the zoning restrictions, and traditional industrial investors have converted a number of IOS properties. Municipalities aren’t creating more outdoor storage, but every MSA needs it for its supply chain infrastructure.”

But Alterra’s multifamily business didn’t just tread water. Addimando remains deeply involved in the company’s strategy in the sector, and he served as president of the Building Industry Association‘s Philadelphia chapter last year.

“I know where to be pushing rents and where concessions are needed” across Alterra’s properties, he said. “We’re evaluating development opportunities in other markets right now, taking the modular development approach we’ve honed in Philadelphia. So far, we haven’t felt like conditions are right to expand into a new market; we’ve been sort of waiting for a correction on that front.”

In addition to helping him assess the viability of growing the multifamily business, Addimando’s exposure to so many other markets gave him perspective on what is possible and sensible in Philadelphia.

“Necessity is the mother of invention,” Addimando said. “In the Southeast and the Southwest, there’s such population growth that rents are skyrocketing, so they pay what they need to pay in order to get new things built. Without the same rent growth up here, that equation is very challenged.”

Alterra Property Group developed one of the largest multifamily buildings in the U.S. in West Philly, selling it for $88M earlier this year.

Noting that the staggering amount of capital looking to invest in value-add multifamily has all but erased the possibility of getting a satisfactory return, Alterra has committed to modular development as a way to control and reduce construction costs, betting that when it stabilizes and sells a property, investors won’t care how it was built. In March, Alterra sold a 250K SF building in West Philly, one of the largest modular apartment projects in the country, for $88M.

“In developing and managing properties hyperlocally like we’re doing in Philadelphia and Greater Center City, you can take for granted that you know the local laws and players,” Addimando told Bisnow. “When you try to scale in a different asset class nationally, it’s almost like you’re starting over, with different capital providers, different people doing deals.”

Only a handful of Alterra employees have duties across both verticals, while around 50 focus exclusively on multifamily and 15 or so do the same with industrial outdoor storage. Though Pfeiffer leads the day-to-day of the IOS operation, Addimando himself was forced to evolve how he worked in order to keep both ventures successful.

“Am I spending five fewer hours a week than I used to on the minutiae of multifamily?” Addimando said. “Yeah, but it’s five hours that I shouldn’t have been spending there to begin with.”

Alterra focused on hiring and elevating “high-ceiling individuals” to handle elements of both multifamily and industrial outdoor storage that Addimando might have previously done himself, he said. Based on Alterra’s continued success in fundraising for IOS and executing multifamily projects in Philly, its best return has come from the investments it made in talent.

“Once you learn that you are dealing with people that always find a way to get it done and do it the right way, I think you can rely on them to expand into more regions or areas of expertise,” Bardonaro said. “Clearly, they not only succeeded in Boston, but ultimately handled projects for us on a coast-to-coast basis.”

CORRECTION, APRIL 14, 10:15 A.M. ET: A previous version of this article misstated the nature of its first deal with Maxim, what year Alterra acquired Maxim’s portfolio of industrial outdoor storage properties and the total value of its most recent fund. This article has been updated.

Contact Matthew Rothstein at matt.rothstein@bisnow.com

Truck terminals and transload yards are essential to supply chain efficiencies. Investors are beginning to notice.

The growing logistics industry has not only created insatiable demand for warehouse space, it has ramped up growth in the transportation industry, creating a need for modern truck terminals with high-volume flow-through facilities. Commercial real estate investors are beginning to take notice and are allocating more of their money to this niche sector.

“Historically, investors in truck terminals were large trucking companies that wanted to own their own facilities, like Old Dominion ABF, SAIA, R&L, Carriers, Central Transport and ESTES,” says Dean Brody, executive managing director and specialist in this investment area with real estate services firm JLL. Today, this sub-sector is attracting big institutional investors and industrial real estate developers/investors. These include Centerpoint, Realterm Logistics, Terreno Realty, Brookfield, Duke Realty, Prologis, Stonemont, Altera, JP Morgan and others that have recently entered this market. Speculative development may not be far behind.

For example, in April, Chicago-based Dayton Street Partners acquired a 17,897-sq.-ft. truck terminal near Tampa International Airport in Florida from a private investor for an undisclosed price. The property is 100 percent leased to ABF Freight. “This was a great opportunity to capitalize on increasing demand in the market and is part of a larger corporate strategy to invest in well-located, logistics-related real estate assets in Florida and throughout the U.S.,” said DSP Principal Michael Schack in a statement.

Integrated Service Provider (ISP) facilities are essential to supply chain efficiencies, Brody notes. Amid higher transportation costs and driver shortages, the need for them has been growing over the pst 15 years. The e-commerce boom has accelerated demand for those facilities by multiples, Brody says.

“The purpose for these buildings is either redirecting cargo mode—usually from container to truckload—or consolidating and redirecting freight direction and what freight rides together,” according to John Morris, executive managing director and Americas industrial and logistics leader with real estate services firm CBRE.

De-containerizing cargo and transloading it onto trucks or rail cars facilitates logistics efficiencies, according to Brody. He explains, for example, that cargo from three 40-foot containers can fit into two 53-foot truck trailers, and it is more cost-effective for those trucks to deliver the cargo than directly transporting it over 50 miles to the final destination because the empty containers then must be returned to the origination point.

Markets that see the heaviest cargo movements have the highest demand for these functionalities, Morris notes. For example, there is a significant density of transload buildings in Southern California’s Inland Empire, where cargo is often moved from the ports of Los Angeles or Long Beach, Calif. because it costs less to de-containerize it there than closer to the ports. “Containers coming in from China are dray-moved to these buildings, de-containerized into different trucks or rail cars and moved out to mostly points further east from there,” Morris says.

The fee revenue models for these facilities are similar to any real estate tenancy—users typically own or lease them, according to Morris. However, many are also third-party facilities, where users are charged through a 3PL arrangement that is a blend of fixed and variable costs. Brody notes that pricing is on a per-door, per-month triple-net basis.

ISPs are located in logistics hubs all over the country. Those near intermodal facilities and ports will have transload options, Brody says, noting that terminals in infill locations in places like Northern New Jersey, New York City outer boroughs, Chicago, Seattle, the San Francisco Bay area, Los Angeles and the Inland Empire are achieving the highest rents.

ISP property values are dependent on location, but cap rates on these assets tend to be on average 1.5 percent higher than those for class-A warehouse properties, according to Brody. He notes that the spread is narrowing in core markets, where cap rates on ISP assets are now only 50 basis points to 100 basis points higher than for a warehouse, or might even be the same.

While returns on investment for ISP facilities are lower than those for warehouse properties, Morris says that they are marginally less expensive to develop, as transloading buildings do not require much clear height, and their structures typically do not need to support heavy automation. Such buildings also have lower coverage ratios, typically about one-tenth of the site, but they do require a lot of land to accommodate the higher number of axles travelling in and out than a traditional warehouse does.

ISPs, which are basically concrete yards with a transloading facility, haven’t changed much over the last 50 years, except modern facilities have 100-foot dock doors as opposed to 70 to 90-foot doors found in older facilities, to provide greater flexibility in movement, Brody says.

Cities generally don’t allow the development of ISP facilities near large population centers, as they have several negative aspects: they are aesthetically unattractive and inherently involve heavy truck traffic and significant CO2 emissions. Therefore, Brody notes that there is tremendous value in land already zoned for ISPs.

Despite high demand for these facilities, they have traditionally been developed on a build-to-suit basis for single-tenant users, such as large Fortune 100 retailers or third-party logistics providers, including Fedex, UPS, XPO and National Retail Systems. But going forward, Brody expects that spec developers will soon begin capitalizing on the growing need for ISP buildings.

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By Patricia Kirk

This product type commands higher rents per square foot in comparison to warehouse and distribution assets, notes Zach Harris of Stan Johnson Company.

In today’s highly competitive marketplace, there’s a new subset of industrial real estate that is catching the eye of net lease investors. Industrial outdoor storage properties, also referred to as industrial service facilities, can be distinguished from more traditional industrial assets in several ways.

This subset typically has a much lower floor area ratio in comparison to warehouse or manufacturing properties. FAR values for IOS/ISF facilities typically don’t exceed 20 percent.

Users of IOS/ISF properties find value in the storage capabilities of the excess yard, which are often concrete paved or crushed rock surfaces. Typical uses for these facilities include equipment storage and maintenance, container yards, bulk material storage and distribution, fleet vehicle storage, trailer parking and drop lots. Properties that can accommodate these unique storage requirements are incredibly attractive to tenants in the fields of equipment rental, trucking, building materials, shipping container, chemical, auto/vehicle parking, energy and waste and environmental services, among others.

IOS/ISF assets command higher rents per square foot of building area in comparison to their more traditional industrial counterparts. The additional value that tenants derive from the larger outdoor storage component helps drive this increase. For this reason, rents for IOS/ISF properties are oftentimes quoted in terms of rent per acre per month for ease of comparison in a market or submarket.

Given the outdoor storage component, and oftentimes infill nature of these properties, there is a limited supply of this asset type, resulting in residual values being greater than traditional industrial properties. The renewal rate for tenants in this sector is also quite high, due in large part to the constrained supply of similar properties and higher-than-average replacement costs. Many of these facilities are primed for future alternative uses, but most landlords find that re-tenanting is simply not an issue. Supply is tight, and tenants in this property sector are benefiting from the e-commerce boom that shows no sign of slowing. This creates a “stickiness” that more traditional industrial facilities sometimes lack and helps keep tenants at their current locations.

The following is a detailed description of the key characteristics of the IOS/ISF sector.

Fragmented Market

Historically, IOS/ISF properties have been primarily owner occupied or owned by local or regional private investors, high net worth individuals and small private equity owners. There has been limited competition to-date from institutional investors on one-off acquisitions due to the smaller transaction size, but that is starting to change as more institutional capital is now flowing into the sector seeking diversification and yield from traditional industrial properties.

Limited Supply

The asset subtype has seen very little new development in recent years. It is difficult in many areas to obtain proper zoning and entitlements for new construction. Many communities don’t encourage low density developments, and if zoning and permits are granted, municipalities may require developers to overbuild the site (e.g., fully concrete paved yards).

Low Vacancy Rates

The IOS/ISF sector consistently reports a lower vacancy rate than the broader industrial market. Currently, market intelligence points to an average vacancy rate between 2.0 and 3.5 percent for the subset, compared to 5.0 to 6.0 percent vacancy across the entire industrial market. The limited availability in this space has led to rapidly increasing rental rates in recent years.

Predictable Expenses

Large expense exposure for landlords is very predictable for IOS/ISF assets. Roof, structure and yard maintenance costs are typically the only big-ticket expense improvements on net lease IOS/ISF properties. Some landlords have stated they are willing to take a risk on vacancy because the cost of re-tenanting is significantly lower than nearly all other asset classes, including traditional warehouse buildings.

Shorter Lease Terms

It is common to see initial lease terms for IOS/ISF properties in the 5- to 7-year range, which is often shorter compared to traditional warehouse space. A potential cause is the historical lack of institutional landlords in the sector pushing for longer term leases. Additionally, because many tenants in the IOS/ISF sector are long-term occupants, it is not uncommon to find tenants operating in their lease option periods rather than their initial lease term.

Local & Regional Tenants

The majority of users of IOS/ISF properties are local and regional companies with smaller credit profiles. However, there are a number of tenants that operate hundreds of locations nationwide and report incredibly strong financials. Some of these household names include ABC Supply Co., Airgas, Beacon Roofing, Carvana, Herc Rentals, SRS Distribution, Sunbelt Rentals, United Rentals, WillScot and XPO Logistics, among many others.

By Zach Harris

Source Article

There is an overlooked segment of the U.S. industrial property market potentially more lucrative and larger in aggregate square footage than the heavily publicized warehouse and distribution center asset class that has capitalized on the surge in e-commerce activity.

Source Article by FreightWaves.com

On paper, industrial outdoor storage seems like a slam dunk investment (https://www.bisnow.com/national/news/industrial/industrial-outdoor-storage-new-hot-investmentclass-106490): low cost of operation, huge demand and “sticky” tenants. But those with experience in the area warn against entering it half-cocked.

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