Alterra closes IOS fund ahead of target and hard-cap

Fundraising for Alterra IOS Venture III was completed within eight months, well ahead of the average time managers are in the market raising their funds.

Alterra Property Group’s latest fund has closed oversubscribed, with international investors providing capital for the first time, PERE has learned. The closing demonstrates demand for industrial outdoor storage continues to flourish.

The Philadelphia-based manager’s Alterra IOS Venture III was closed this week at $925 million, well beyond its original target of $750 million and hard-cap of $850 million, according to the firm. Park Madison Partners served as the exclusive placement agent. Its predecessor closed at $524 million, according to PERE data.

“Sometimes you have a product offering that the market is overly receptive to,” said Leo Addimando, chief executive of Alterra. “Within industrial, [investors] are seeking a little bit of diversification away from potentially just more and more big box warehousing – and they’re seeking more niche strategies.”

However, he added that while industrial outdoor storage is considered niche the firm estimates the value of the market to be approximately $200 billion, about 10 perfect of the value of the overall industrial market in the US.

Fundraising for the fund took eight months, notably quicker than today’s fundraising average time in market for vehicles in the sector.

“We launched in January of 2023, which was a very difficult time to raise capital in the real estate world and alternatives in general,” said Alterra chief investment officer Matthew Pfeiffer. “We were able to secure a number of meetings from a wide range of investors. The interest that we’ve been hearing in what we were doing was pretty high relative to the larger market.”

The limited partners in the fund were a mix of public and private pensions, endowments and foundations, sovereign wealth funds, asset managers, family offices and high-net-worth individuals. Three investors from outside the US committed capital to the firm for the first time since it launched the series in 2016.

“This particular strategy within US real estate has now become a bit more understood and sought after, again, not just by the US institutional investors, but international institutional investors,” Addimando said.

The focus for the series is to acquire infill properties in the US and Canada. The firm has completely deployed the capital from Alterra IOS Venture II, bringing Alterra to approximately $3 billion in assets under management.

Addimando added that access to outdoor storage for institutions and pensions funds can challenging given the size of typical individual deals. These are often $10 million or smaller, so a manager is required to aggregate them. “There are only so many managers in the space that have the institutional pedigree and a team already built,” he said.

Typically, IOS refers to land zoned for industrial use where a tenant would have outdoor storage requirements, such as vehicles, equipment or containers. So far there has been little institutional investment in the industrial sub-sector and Pfeiffer said that shortage, as well as limited available data, meant the market was fragmented and opaque.

Other firms are seeing similar success with the asset class. Last month, Catalyst Investment Partners beat the fundraising target for its second fund for industrial outdoor storage, closing Catalyst IOS Fund II at $186.9 million – above the intended target of $150 million.

Last year, Quilvest Capital Partners Axis IOS launched a joint venture with the view of acquiring and operating an approximately $500 million portfolio of industrial outdoor storage properties in the US.

By Miriam Hall, PERE News

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Alterra IOS buys 5-acre Philadelphia site for ‘Very Unique’ $40M project

A joint venture between Alterra IOS and Eco Materials bought a 5-acre site in Southwest Philadelphia for $5.75 million with plans to build a soil recycling facility.

Including the purchase price for the property at 6110 Passyunk Ave., the project is expected to cost $40 million. Construction began this month, and the facility is planned to be in operation by spring 2025.

The clean wash facility would accept non-hazardous contaminated soil, likely from construction companies that would otherwise dump it in a landfill. The soil would then go through a cleaning process, leaving up to 85% suitable for sale and reuse. The facility is designed to recycle up to 250 tons per hour.

Alterra IOS is the industrial outdoor storage arm of Alterra Property Group, and Eco Materials was founded last year to provide an environmentally friendly alternative for the disposal of waste from construction sites. Both companies are based in Philadelphia.

Alterra Property Group Managing Partner Leo Addimando and Eco Materials General Manager Andrew Paluszkiewicz said there are fewer than 10 facilities in the United States dedicated to this aggregate recycling process. Soil that is dug up during construction projects is required to be disposed of safely, and recycling the soil instead of dumping it benefits the environment, they said.

“The fact that we’re just taking all of our excavated dirt and we’re putting it in landfills next to plastic bottles and your trash from your garbage bin, it’s mind-blowing to me,” Addimando said. “Eighty percent of this or more could be recycled, put back into the construction ecosystem.”

Alterra Managing Partner Leo Addimando sees opportunity in a new soil recycling facility in Southwest Philadelphia.

Money for the project came from Alterra IOS’ recent $900 million fundraising round for industrial outdoor storage, Addimando said. A portion of the fund can be used for industrial projects other than outdoor storage.

While Alterra Property Group has established itself locally for converting offices to residential, its IOS division has expanded rapidly, acquiring properties across the country.

Paluszkiewicz is also president of American Sitework and has spent 20 years in the site work business. He began exploring aggregate recycling about two and a half years ago. Given his background, he immediately thought the process made sense.

“I never really took time to look at soil before this and realize the sand content and the stone content,” Paluszkiewicz said. “I was always just loading it and getting rid of it. But when you actually start to break it down, you realize there’s valuable aggregate within that bad dirt.”

Paluszkiewicz identified a land site and signed a lease with Passyunk Avenue Realty Enterprises, which owned the property before the joint venture bought it. He also secured permits to operate the facility. It was a risky process since Paluszkiewicz still needed a partner to help finance the project.

As soon as he was introduced to Addimando, the two shared the same vision.

While this type of recycling facility is rare in the United States, Addimando said there are hundreds in Europe. He and Paluszkiewicz have toured facilities in England and Northern Ireland.

“The United States is lagging what Europe’s been doing,” Paluszkiewicz said. “But as [environmental] regulations have gone up, it’s driven the need for this kind of equipment. I always say to my partners, someone’s going to build one of these. It might as well be us.”

The Passyunk Avenue property is near HRP Group’s Bellwether District, a 17.5 million-square-foot industrial and life sciences project at the former site of the Philadelphia Energy Solutions refinery. It’s also near Falcon Concrete, which Addimando said is one of the largest concrete providers in Philadelphia.

Between those two operations and knowing how much dirt moves around Philadelphia regularly, Addimando and Paluszkiewicz are optimistic about the recycling facility.

“This is the first investment that I’ve seen that is a very sound and profitable business, and also is incredibly environmentally conscious and with no compromise of one to get the other,” Addimando said. “That, to me, is very attractive. It’s a very unique opportunity.”

By Paul Schwedelson – Reporter, Philadelphia Business Journal

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Alterra Expands Holdings of Industrial Outdoor Storage Space in Atlanta Area

Investors Target Outdoor Areas Aimed at Tenants in Need of Storing Trucks, Equipment

Alterra IOS paid $22.4 million for a collection of industrial outdoor storage properties in metro Atlanta, boosting the investor’s exposure to a niche sector that’s in demand from a wide variety of customers.

The three properties cover a total of 28 acres and are located in the northeastern and southern suburbs of Atlanta. The sellers were J&E Real Estate Investments, Harcon Inc. and Industrial Storage Fund III.

Industrial outdoor storage areas provide space for the owners of tractor trailers, heavy equipment and construction materials to store company property. The building type has high demand but is in low supply due to difficulties obtaining land and zoning permits, according to the Urban Land Institute.

Manulife Investment Management and Foundry Commercial formed a joint venture to acquire, develop and lease industrial outdoor storage areas in the Southeast. Other institutional investors have also targeted the niche segment, including TPG Angelo Gordon and Fortress Investment Group.

Alterra, based in Philadelphia, closed the $925 million Alterra IOS Venture III fund in May, targeted to the sector. The fund attracted a diverse group of investors, including pensions, sovereign wealth funds, endowments and high-net-worth individuals.

In the recent deal in the Atlanta area, Alterra acquired the following properties:

• 2620 Campbell Blvd. in Ellenwood, Georgia, sold by J&E Real Estate Investments, based in Atlanta, for $12.5 million.
• 498 Tuggle Greer Drive in Buford, Georgia, sold by Harcon Inc. of Alpharetta, Georgia, for $6 million.
• Liberty Industrial Park in McDonough, Georgia, was sold by Atlanta-based Industrial Storage Fund III for nearly $3.9 million.

The Liberty Industrial Park property is under construction and is expected to open in the fourth quarter, Alterra Senior Vice President Charlie Totten said in a news release. It will include two separate storage areas covering a total of 26,000 square feet and feature three separate entrances.

The Ellenwood property is in the Interstate 675 corridor near Hartsfield-Jackson International Airport, the location of the largest concentration of truck terminals in metro Atlanta, including Old Dominion Freight Line and Southeastern Freight Line. The 10.5-acre paved industrial outdoor storage property includes a 24,500-square-foot maintenance building.

The Buford property is a 5.3-acre paved site with access to interstates 85 and 985 and includes 39,000 square feet of warehouse and office space.

For the Record
Park My Truck USA facilitated the sale of the Liberty Industrial Park property, and Steven Bridges and Nat Weikert at OnPace Partners are representing Alterra on leasing for that property. Christian Samartino at Piedmont Properties and Jordan Camp at Oakley Brokerage Partners facilitated the sale of the Ellenwood property. Mendy Ruder at Lee & Associates represented Alterra on the Buford property and will represent Alterra on leasing for that property. James Freeman at Rittenhouse Law was legal counsel on the Buford sale.

By Andy Peters, CoStar News

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Heniff Transportation Completes Sale-Leaseback of 14 Truck Terminals

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By CoStar News

Alterra Property Group Affiliate Pays $86 Million in Sector Attracting Investor Capital

An affiliate of Alterra Property Group has paid $86 million for a trucking facilities portfolio, a sector newly attracting investor capital.

Alterra IOS Manager said it acquired a 14-property outdoor transportation facility portfolio in a sale-leaseback deal with Heniff Transportation Systems, a national bulk transportation provider based in Oak Brook, Illinois.

Philadelphia-based Alterra bought the portfolio on behalf of a private equity real estate client.

The locations serve as terminals, maintenance shops and load facilities in key industrial markets including Chicago, Illinois; Dallas and Houston, Texas; Memphis, Tennessee, Cincinnati, Ohio; Mobile, Alabama; Savannah, Georgia; and Lake Charles, Louisiana.

The portfolio is being fully leased backed by Heniff, which operates nearly 100 locations nationwide.

“In a market with interest rate fluctuations and volatility, it was imperative to work with a group that has full discretion over its capital and deal directly with the key decision makers to get to closing. We look forward to expanding the Heniff and Alterra relationship as we continue to expand our network,” Bob Heniff, founder and CEO of Heniff Transportation, said in a statement.

As the nation’s pandemic-fueled industrial real estate boom in warehouse demand shows signs of slowing, outdoor logistics facilities have grabbed institutional investor attention.

By Mark Heschmeyer
CoStar News

December 16, 2022 | 2:43 P.M.

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

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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

Covid-19 Shipping Boom Drives Land Rush Near Ports

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By wsj.com

Covid-19 Shipping Boom Drives Land Rush Near Ports

Demand surges for lots suitable as container-storage facilities, lifting rents and property values

Ports are running out of space to store containers. That is leading to a land rush in an obscure corner of the real-estate market.

Logistics companies and port operators are racing to lease vacant land close to container terminals, driving up rents and property values and spurring more investment in coastal outdoor-storage properties.

This land rush is the latest example of how a rise in shipping, prompted by strong consumer demand for goods during the Covid-19 pandemic, is shaking up the real-estate sector.

E-commerce has already turned warehouses and fulfillment centers into one of the hottest property types. Now vacant lots that can be used to stack loaded containers waiting for rail or truck hookups are experiencing a surge in demand.

The Georgia Ports Authority, which runs Savannah’s port, said it has leased six lots in Georgia, Alabama and North Carolina and turned them into pop-up container-storage facilities. Savannah is one of the country’s largest and fastest-growing ports, but doesn’t have enough space to store the increasing number of containers arriving at its terminals.

In the past, loaded containers used to stay at the port for four to five days before moving on, said the port’s regional manager, Thomas Wyville, at a conference hosted by the commercial real estate trade group NAIOP Inc. last week.

Now the containers often sit for eight to 10 days, taking up space and making it harder for the next ships to unload their cargo. “You have to get the containers off the terminal,” he said. The pop-up facilities are meant to help with that.

Rents are surging fastest near ports in dense urban areas that have less vacant land, such as Long Beach, Calif. The vacancy rate for industrial real estate in Los Angeles was just 0.5% in the first quarter, according to CBRE Group Inc.

“In Los Angeles, unless you dig up some more ocean, you don’t have any more terminals, and it’s the same thing in New York and New Jersey,” said Curtis Spencer, chief executive of customs and logistics consulting firm IMS Worldwide Inc., which is involved in a container-transfer development in Southern California’s Inland Empire.

Each day, millions of sailors, truck drivers, longshoremen, warehouse workers and delivery drivers keep mountains of goods moving into stores and homes to meet consumers’ increasing expectations of convenience. But this complex movement of goods underpinning the global economy is far more vulnerable than many people imagined. Photo illustration: Adele Morgan

Each day, millions of sailors, truck drivers, longshoremen, warehouse workers and delivery drivers keep mountains of goods moving into stores and homes to meet consumers’ increasing expectations of convenience. But this complex movement of goods underpinning the global economy is far more vulnerable than many people imagined. Photo illustration: Adele Morgan

Logistics companies, squeezed by surging demand and labor shortages, are struggling to get containers away from a port quickly, compounding the problem. Storing empty containers is another problem for ports across the U.S.

There are few sites near ports that are large enough and have easy access to roads or rail.

Zoning is also a concern: Local rules often restrict heavy industrial use and make it illegal to stack containers on top of each other. That is driving up rents for those few sites that tick all the boxes.

“We’ve seen a tremendous amount of demand for these locations,” said Matthew Pfeiffer, co-managing partner of real-estate investment firm Alterra Property Group, which owns a number of outdoor-storage properties near ports and is looking to buy more.

Pop-up container-storage yards, such as this inland facility in Crandall, Ga., help relieve the demands on port terminals.

PHOTO: GEORGIA PORTS AUTHORITY

Demand has surged so much that in some cases rents for vacant land are as high as for buildings.

Alterra is considering tearing down a building near the Savannah port used by a building-materials company after getting inquiries from companies in need of land to stack containers, Mr. Pfeiffer said.

Some companies are becoming increasingly creative as they look for space. Container-storage company Chunker said it has signed deals to use vacant Sears department stores and their parking lots near California ports to unload containers, according to Chief Executive Brad Wright.

Mr. Spencer of IMS Worldwide said he expects pop-up storage facilities to become a permanent phenomenon, because the fundamental problem of a rise in shipping and lack of land isn’t going away. “That’s just taking the edge off the terminal now,” he said. “What if I grow 5% next year? I have to find room for that.”

Are Transload Facilities the Next Frontier in the Industrial Investment Race?

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

The Industrial Subset That’s Even ‘Stickier’ Than Traditional Warehouses

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

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ISFs Could Be the Next Industrial Real Estate Gold Rush

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.

“Industrial service facilities” (ISFs) is the formal name for stand-alone structures used to store and maintain rigs, trailers, containers and chassis, as well as bulk materials. Fleet maintenance facilities and parking lots are also included in the ISF classification. ISFs, which have been around for years, typically are small structures that occupy between 5% and 20% of a parcel of land that the building sits on. The facilities are embedded deep in a city’s heavy industrial network, near highways and rail lines so the equipment can be utilized at a moment’s notice. Land expansion is limited because few zoning boards will approve the development of these gritty properties in residential or nonindustrial commercial neighborhoods.

Many of these buildings are controlled by high-net-worth individuals and mom-and-pop businesses. Some are as small as 100 square feet, and transaction price tags of $7 million to $10 million (if that) barely register with large-scale developers consumed by the big-box bonanza. If the big boys own any ISFs, it’s usually because they’ve come along for the ride in an acquisition involving millions of square feet of industrial space. Some developers won’t play at all because they are mandated to stick with big-box properties.

Yet from small things a big picture has begun to emerge. An article by real estate data firm CoStar that appeared earlier this month on the website of Houston-based Triten Real Estate Partners stated that there are $115 billion to $130 billion of ISF properties nationwide, according to data from CoStar and the Bureau of Economic Analysis. That compares to $45 billion to $50 billion of Class A top-tier warehouse space, according to the article. By one rough estimate, ISFs in total make up about 800 million square feet.

ISF rents are solid and rising because zoning laws put curbs on new developments. ISF tenants are stable, long-term occupants that, in turn, work with customers that have consistently recurring business. ISFs may not be sexy, but they provide must-have services for supply chains that support multiple industries. ISFs can often command higher rents per square foot of building area than warehouses and distribution centers because tenants derive additional value from the storage capabilities as well as the building itself. In addition ISFs are flexible enough to be considered candidates for conversion to other uses, though for the most part that’s not the developers’ end game.

The lure of consolidating such a fragmented but lucrative category has sparked a mini-gold rush of sorts. Triten recently secured a $150 million investment from an unidentified institutional investor to acquire about $400 million in ISF properties over the next three years, according to the article. On Monday, Atlanta-based Stonemont Financial Group, an industrial developer and real estate investor with 15 million square feet of traditional warehouse space under management, said it established a $1 billion joint venture with an affiliate of New York-based Cerberus Capital Management LP for the sole purpose of acquiring ISFs nationwide.

The venture represents Stonemont’s first foray into the ISF world. Stonemont’s core goal is to “bring this asset into the mainstream,” said Andrew T. Smith, a Stonemont portfolio manager, in a phone interview Monday.

Industrial Outdoor Ventures, a Schaumburg, Illinois-based company that has called itself the only national investor specializing in ISFs, is involved in a deal with investment firm Stockbridge Capital worth between $300 million and $400 million, according to Smith. Industrial Outdoor was unavailable to comment. The earliest deal in the cycle occurred in January 2020 when J.P. Morgan, Chase & Co. (NYSE:JPM) entered into a $300 million joint venture with Philadelphia-based Alterra Property Group LLC to buy up ISFs.

The ISF network has largely been ignored because the smallish deal sizes, on an individual basis, lack the scale that institutional investors crave. However, the promise of big-time roll-up opportunities has made institutions reexamine the sector.

“There is a whole ecosystem revolving around trucks, trailers, parking, and chassis and container yards that is under our nose in plain sight,” Scott Arnoldy, Triten’s founder, was quoted as saying in the CoStar article. “It’s just an incrementally fragmented asset class that the brokerage community is not very deep in.”

By Mark Solomon

Source Article by FreightWaves.com

Industrial Outdoor Storage Veterans Warn Newcomers of Potential Pitfalls

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.

Because it is so different from other asset classes, industrial outdoor storage requires a unique base of knowledge and experience to distinguish the good deals from the bad. If the volume of investors entering the market is about to rise as high as panelists at Bisnow’s Industrial Outdoor Storage Update webinar on Dec. 9 predict, expertise will be a key differentiating factor.

For decades, IOS has been the exclusive province of either owner-occupiers or local and regional owners. Any investor looking to build a national portfolio will face the same challenges as legacy owners, only at a larger scale and greater complexity.

“The aggregation of a portfolio and the unique challenges to due diligence and management are really not to be taken lightly,” Realterm Vice President of Investment Derek Fish said on the webinar. Realterm has owned and managed IOS properties for more than 30 years.

As with any sort of industrial usage, an environmental review is a crucial element of due diligence, but there are quirks to each site that can seem small but wind up disqualifying for potential tenants: As little as one stoplight too close to the property in question could be a deal breaker, Fish said.

Realterm and Alterra Property Group (https://www.bisnow.com/tags/alterra-property-group), which entered the sector about four years ago and now has a joint venture with JPMorgan (https://www.bisnow.com/tags/jpmorgan) to purchase IOS properties, both have whole teams dedicated to sourcing and vetting acquisitions, Fish and Alterra principal and Chief Investment Officer Matt Pfeiffer said.

“This is a high-volume business for transactions, so you need to centralize all your due diligence, your environmental review, etc., so you’re just dropping a team nationally into every single space so you analyze transactional risk the same way for each deal,” Pfeiffer said. “And if you don’t do it that way, you slow down.”

Brookfield Properties (https://www.bisnow.com/tags/brookfield-properties) started investing in IOS in the middle of last year and doesn’t have a dedicated team yet, but the private equity giant overcomes that disadvantage by having a bigger appetite for risk, Brookfield (https://www.bisnow.com/tags/brookfield) U.S. Head of Real Estate Management Devin Barnwell said. One of the most common risks in the space is in the quality of tenant, given that users tend to stick around long term. Adding value to a recently acquired property with an occupant already in place may not be viable.

“The majority of [tenants in] your portfolio will be regional or local companies that won’t be able to commit to longer leases, won’t be able to share in the capital required for improvements and will be very sensitive to rent increases,” Fish said. “The most common user of IOS is often a low-margin business, so a big increase in rent to market rate could destabilize the tenant.”

A small operator could also be more likely to be a less-than-ideal tenant, which has a slightly different impact in a part of the real estate market that universally functions on true triple-net leases, panelists agreed. Barnwell recommended ensuring that an IOS property has comprehensive insurance coverage.

“There is a responsibility on ownership to make sure that tenants are performing their duties,” Barnwell said. “If they defer maintenance, you may wind up having to spend capital [to fix properties] down the line.”

If an owner has the legal leeway to not renew a low-margin tenant in the hope that it can land an ecommerce (https://www.bisnow.com/tags/e-commerce) merchant — as with distribution centers, Amazon (https://www.bisnow.com/tags/amazon) is by far the biggest source of demand — then a knowledge of the local zoning particulars is a necessity.

“We’ve also seen in certain municipalities that [IOS] might be a currently allowed or nonconforming use, and if that’s the case, what are the changes that could possibly happen?” Barnwell said. “You may need to find a new tenant in six months after your previous one vacates or risk losing your zoning.”

Still, the combined forces of rising e-commerce demand and no real pathway toward an infusion of additional supply ultimately will prove that industrial outdoor storage’s risks aren’t enough to scare anyone off, panelists agreed.

“The costs [of owning IOS property] are insurance and real estate tax, which is very low compared to the carrying costs in other sectors,” Pfeiffer said. “If you’re in a good market or a good location, you should not be afraid to take a vacancy risk. And the tenant improvements are not costly enough to provide meaningful friction in leasing.”

Source Article by Bisnow