Industrial outdoor storage garners more attention, investment

A surge in e-commerce activity during the pandemic sent fulfillment providers scrambling to find additional space to meet the need. Warehouse acquisition and build costs have soared alongside rents, which appear poised to see major hikes again this year. While the need for finished space remains high, so does the need for lesser-improved real estate.

Demand for industrial outdoor storage (IOS) is at an all-time high. This subset of the commercial real estate market consists of lots and yards, which are used as storage facilities. The tenants are often transportation and logistics providers as well as companies serving the construction and infrastructure markets. The common theme among this asset class is that less than one-quarter of the acreage is usually occupied by a building. It’s more or less a staging area for heavy vehicles and equipment, stacks of containers and materials. The facilities are also being used for truck parking, which is in short supply.

The increased need for IOS space has created interest from institutional investors with one real estate startup looking to capitalize on the emerging asset class in a big way.

Zenith IOS seeks $700 million in assets

Brooklyn-based Zenith IOS is a vertically integrated firm facilitating the investment, development and management of IOS facilities. It was founded by Ben Atkins and Daniel Laub in 2021 with the sole purpose of acquiring outdoor storage assets in the U.S.

Atkins and Laub have a history as friends and “agnostic, opportunistic real estate investors,” Laub told FreightWaves. The two were working on the development of a self-storage facility in Staten Island when the idea of aggregating IOS properties came to be.

“Throughout that project, we kept seeing this recurring theme of companies, businesses and individuals reaching out to us, inquiring if we had land available, if we had parking available,” Laub said. “We never really did. But through those inbounds we put our heads together and started thinking about what that would mean as a business.”

The two started a test case in Dallas last year, acquiring several properties for a total of $75 million. The proof of concept took hold and in February it launched a joint venture with J.P. Morgan Global Alternatives to acquire $700 million in IOS real estate. So far, Zenith IOS has properties in 15 to 20 markets across the U.S, roughly half of which are directly tied to transportation and logistics.

Zenith IOS acquires sites with tenants in place and also works with prospective users to find space that will meet their needs. A deep capital commitment from J.P. Morgan allows it to better tailor facilities by upgrading fencing and lighting or make other security enhancements, all of which make the leases with tenants stickier. It also executes sale leasebacks for sellers looking to lock in profits on recent valuation increases or free up capital for other needs.

“As our portfolio grows and our tenant relationships deepen, we are increasingly fielding inbounds from national tenants who have requirements that we might be speaking to them about in one market and they’re asking us if we can satisfy those requirements in another market,” Atkins said.

Atkins sees IOS as a multi-hundred-billion-dollar market. Given an increase in land costs, most developers are trying to maximize the size of finished warehouses at each site, meaning there is less space for IOS activities. That’s been a tailwind to demand.

The IOS market also has highly fragmented ownership when compared to other real estate asset classes. Because there are multiple owners of these facilities there is little uniformity in the functionality of the spaces, many of which are not “institutional quality.” Security deficiencies, unpaved surfaces and uneven terrain are some of the issues driving “a huge appetite for quality outdoor storage space.”

Atkins and Laub were also attracted to the relatively low capital requirements of maintaining IOS sites when compared to indoor storage spaces. The costs to get a site ready for occupancy are typically “basic,” with minimal construction headwinds and fewer supply chain constraints procuring materials as roofed square footage is only a small portion of the site.

Zenith IOS is working to bring the facilities it acquires up to a level that garners institutional investor interest and creates a standard for tenant expectations across its platform.

Rents are up and to the right

Rental growth has been extremely strong across the IOS market, often outpacing warehouse rents, which logistics real estate giant Prologis (NYSE: PLD) forecasts will increase by 22% in 2022. “We’ve been well north of that,” Atkins said.

“At the moment, we are still seeing enormous demand and I think that’s a function of the fact that the space was very much underserved,” Atkins continued. “In most core markets, we’ve all heard about truckers having to park on the highway, … shipment containers being backed up on ships. There’s just been an enormous backlog of demand.

“You’re almost making the market … within reason. The rents that people have been charging versus what people are really willing to pay for space … there’s a huge disconnect.”

Industrial land, which could accommodate IOS growth, continues to get squeezed as new warehouses are being built and some parcels are being zoned up for commercial or residential use. That’s occurring at the same time the nation’s industrial complex expands.

He did acknowledge that a recent pullback in freight demand has resulted in fewer suitors in some instances. “If there maybe were 10 users looking for one space and now it’s down to four or five, there’s still a need for space that’s resulting in demand and rental rates staying very, very strong,” Atkins said.

They’re not alone

Other real estate firms have also partnered with financial backers to aggregate IOS assets. Atkins said new entrants are emerging with regularity now.

Last month, Bay Street Capital and Drake Real Estate Partners formed a joint venture with plans to close on $100 million in IOS assets by the end of the year. Also, Criterion Group and Columbia Pacific Advisors continue to make progress on a goal of acquiring $2 billion in assets by the end of 2023.

“We are very excited about building a multi-billion-dollar IOS platform,” Atkins said. “We still feel like we’re relatively in the early innings in the space and the large majority of the assets are still not institutionally owned.”

More FreightWaves articles by Todd Maiden

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