With stormier days ahead for commercial real estate, those betting on an asset class likely to thrive are flocking to industrial outdoor storage — if they can find the increasingly rare properties.
The niche industry is young and not without its challenges, including a fragmented seller base and a difficult financing market. But it has proved its resilience in a crisis before, growing into a $200B asset class during and after the last sharp economic downturn 15 years ago.
Managed truck parking and outdoor storage did well during the economic recession of 2008, Timber Hill Group chief operating officer and co-founder Ryan Battistoni said at Bisnow’s State of Industrial Outdoor Storage digital summit Jan. 18.
Yet few were paying attention at the time, he said — a mistake not likely to be repeated given the e-commerce boom has spurred skyrocketing demand for a diminishing number of far-flung IOS lots. Should the overall market soften again, Battistoni said, it’s apt to lead to even more demand and opportunity in the IOS space.
“If a carrier has a certain number of pieces of equipment in a market that’s mission critical to their business and their business drops by 20%, it doesn’t mean they’re mothballing their fleet elsewhere,” Battistoni said. “It means their demand for outdoor storage and truck parking has actually risen slightly.”
Matt Pfeiffer, managing partner for Alterra Property Group, which has placed a more than $500M bet on IOS so far, said the early days of the pandemic showed its hardiness in a crisis. Though e-commerce got a huge boost at the time, other transportation logistics tenants were not necessarily looking for more long-term storage.
“We had tenants in the bus transportation business. There weren’t a lot of people taking buses during Covid,” Pfieffer said. “They never missed a rental payment. We had 100% rental collections.”
While there will always be a small percentage of tenants that miss rent payments, finding tenants and charging favorable rent prices is not one of the issues facing the industry.
Battistoni said he doesn’t see any real risk of higher vacancy or a slowdown in absorption, though an extremely rapid expansion of rental rates will probably abate in the months ahead. Zenith CEO and co-founder Benjamin Atkins agreed, pointing to the 50% to 100% year-over-year hikes in rental rates Zenith has seen in some markets.
“We don’t expect to see that continue,” Atkins said. “But when people don’t understand the IOS space, I think they always think of it, essentially, as truck parking. It’s actually quite a diversified tenant pool.”
One major challenge of IOS real estate is finding large deals, Open Industrial CEO Michael Rabin said.
A limited number of properties around the country, a number of them under the ownership of mom-and-pop operators, naturally translates to a higher volume of smaller deals. Rabin said that contributes to a lack of brokers “captive” to selling and leasing IOS assets, making it harder to outsource leasing and management of properties.
“Relative to other asset classes, you need a disproportionate amount of human capital to really scale in this business,” Rabin said. “There’s more creation of due diligence rather than seller-provided due diligence, which is added work.”
The real estate is also simply land rather than improved properties, which leads to a lower price point and commissions that aren’t as attractive to brokers, he said.
When it comes to creating new outdoor storage, there are always zoning and environmental challenges as well.
IOS zoning is a gray area because municipalities often don’t contemplate these uses until they are already being developed, forcing them to adapt in real time, Atkins said. Many city building departments are overwhelmed, so considering delays in the permitting process is important when planning how long it might take to activate a site, he said.
There is also not a lot of available land zoned for outdoor storage, Pfieffer said. And it can be a tough sell convincing municipalities to zone it that way.
“’Let’s do more outdoor storage that pays lower taxes, and also has the highest utilizations of our roads, bridges, tunnels but doesn’t generate tons of jobs compared to a traditional industrial use,’” is the skeptical response of some localities, Pfieffer said.
Like self-storage and manufactured housing, two other asset classes that have risen in popularity in recent decades, IOS is considered almost recession-proof. But while self-storage and manufactured housing tenants are individuals, IOS deals with Fortune 500 companies.
This gives IOS a good chance of becoming institutionalized. Last year, Alterra closed on $524M in capital commitments for its first commingled fund focused on IOS properties, while big players like New York-based Thor Equities have also made big investments in the space, PERE reported. Zenith and JPMorgan have also launched a $700M joint venture focused on the asset class.
Pfieffer said the asset class has a “long runway” to get to institutionalization. One hurdle remains reliably securing financing. While the benefits of IOS should be very attractive to lenders, the trouble is convincing them of that.
“What happens when it goes bad in our space? We lost a tenant. We underwrote a rent, whatever. Those things are going to happen … but our carry costs are de minimis,” he said.
“We actually have in spades what lenders really want. It’s just bringing that message out and proving it to them.”