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By Matthew Rothstein, Bisnow East Coast

Industrial outdoor storage may seem like perhaps the least sexy form of commercial real estate, but it has suddenly become a commodity hot enough to attract interest from massive sources of institutional capital.

IOS, as some in the sector call it, refers to properties that mostly provide uncovered ground to keep items often needed by industrial users with other business nearby, from truck trailers to construction materials. Over the course of the past couple of years, national players like Brookfield Properties and JPMorgan Asset Management have come around to IOS as an asset class that costs very little to maintain but has a reliable cash flow and a favorable ratio of supply to demand.

The most common IOS sites range from 3 to 20 acres, with less than 25% of land occupied by buildings (a small office for site management, in most cases). The property type is far from new, but has been the exclusive province of either owner-occupiers or local and regional property owners until very recently, multiple sources told Bisnow.

Unlike distribution centers, which have strong demand but also steadily expanding supply, there is little reason to believe that the pool of available properties will grow significantly anytime soon. Any property that would be well-located for IOS is also suited for higher, better uses of land, from warehouses up to multifamily developments. Even those who extol the virtues of IOS as an investment recognize how low it ranks on the scale of acceptable uses of real estate for municipalities.

“The entitlements just aren’t there,” said Devin Barnwell, Brookfield Properties’ U.S. head of real estate management and logistics. “I haven’t seen truck terminals being developed anywhere in the country.”

For many users, IOS is mission-critical real estate, meaning it is an irreplaceable part of a company’s business model, multiple sources told Bisnow. Logistics companies, including shipping giants FedEx and UPS, use outdoor truck terminals to quickly move goods from one truck to another without clogging up the traffic at a distribution center. Construction companies that use IOS to store building materials have few, if any, alternatives for where to keep them near a construction site but not on it.

Because IOS sites are only useful insofar as they service a core business located somewhere else, they are generally only viable within metropolitan areas and very close to roadways that can handle truck volume. For truck terminals or storage of shipping containers, proximity to a port is also important.

“In the supply chain, transportation is about 50% of costs, and when you think about the last mile being the most expensive, the critical nature of these properties really is location,” Barnwell said.

The most common lease structure at industrial outdoor storage properties is a “true triple-net” lease, wherein the tenant is responsible for nearly all site upkeep and costs, Barnwell said. The biggest capital expenditure a landlord might be responsible for is pavement replacement in lots where the weight of what is stored exceeds a surface’s capacity.

Add up the above factors, and IOS reads like an investor’s dream: simple to manage, easy to lease, reliable as a source of revenue and with higher average cap rates than distribution centers. No wonder that the pool of buyers has rapidly become more crowded.

Brookfield has only been active in IOS — specifically truck terminals — since mid-2019, but the product already accounts for 10% of its logistics portfolio in terms of dollar value. The private equity giant wants to own from $300M to $500M worth of IOS property, a number it is “quite a ways away from at this point,” Barnwell said.

Alterra Property Group, known in its hometown of Philadelphia as a developer of mixed-use and multifamily projects, began investing in industrial outdoor storage sites in 2017, not long after a Chicago-based company named Industrial Outdoor Ventures was formed specifically to acquire and manage such properties.

At that time, IOS resembled single-family rental properties and self-storage in terms of its ownership and treatment by the national investment market, Alterra partner Matt Pfeiffer said. When Alterra entered the sector, it estimated that about $15B of IOS deals had transacted in the previous year or so, with an average deal size of $5M.

There is already more demand for IOS than there is supply, and the disparity looks like it can only grow. While that creates an appealingly high barrier to entry for investors, it means that the only way an investor can build scale is through acquisitions. Institutional investors have little time to source such small deals with local owners and, potentially, local brokers.

“We saw an opportunity to institutionalize the asset class, and to bring in programmatic debt and capital at a national scale,” Pfeiffer said.

Alterra now has an ownership stake in more than 40 properties across 12 states, with a handful of them acquired as part of a $300M joint venture it formed with JPMorgan Chase in December. JPMorgan had already been involved in the asset class for