By Mark Heschmeyer, CoStar News
As demand for industrial real estate spreads beyond warehouses into outside storage for trucks and heavy equipment, Alterra Property Group is lining up major investors to amass a portfolio of these low-cost utilitarian properties.
Alterra, based in Philadelphia, and institutional investors advised by J.P. Morgan Asset Management formed a $300 million joint venture to buy properties they’re calling industrial outside storage, or IOS for short. Alterra considers these sites to be untapped assets within the broader traditional industrial property sector. It comes as investments in other types of industrial real estate, including self-storage, data centers and biotech labs, have been increasing in recent years.
The Alterra-led group seeks to add another category by acquiring properties leased to tenants needing two to 50 acres for outside storage and who only require a small building – about 20,000 square feet or so. Such properties sell in a range from a few hundred thousand to a few million dollars, far less than the typical institutional investor target that can reach into the tens of millions of dollars or more.
Ownership of such properties is highly fragmented. Most landlords are local and private, with outside storage tenants ranging in activity from truck parking, port-related container storage, equipment rental, building materials and petrochemical delivery. But one thing they have in common: There’s a finite supply, which means their value may be poised to increase.
“The U.S. economy is based on something being manufactured in one place and consumed in a different place. Those goods make several stops between the plant and the point of consumption,” Leo Addimando, founder and managing partner at Alterra, told CoStar. It is those stops in between on which Alterra is focusing.
Private owners and owner/users have made up about $7.6 billion of the five-year total of $10.1 billion in property purchases matching Alterra’s criteria, according to CoStar data. Such sales averaged about $1.8 billion a year from 2015 to 2018 but jumped to $2.6 billion last year.
Such properties are critical for supporting the growth of online shopping and new construction. For warehouses to be useful, shipping containers, semitrailers and rail cars are needed to move goods around. For new buildings to be built, materials and equipment need be shipped to construction sites.
“All of that has its own support real estate needs,” Addimando said, “and so we’re buying those yards. At the end of the day, we’re basically buying the growth of the economy.”
The goal of the joint venture is to build a portfolio valued at several hundred million dollars, centered on single-tenant leases, and that capitalizes on the shrinking supply of outside storage sites in growing markets.
Users of such locations have specific location requirements, according to Addimando. They want to be in the path of growth.
“In a lot of cases, they are getting priced out of places where they naturally need to be to access their customers,” Addimando said. “If you’re the landlord, you’re really in a win-win situation. You feel good because if they leave it empty, it’s just worth a lot more money as something else.”
Finding yield beyond the traditional property segments is growing, according to Alterra and J.P. Morgan. Property types outside the four traditional sectors of office, multifamily, retail and industrial distribution centers now account for about 40% of the publicly traded real estate investment trust market.
Publicly traded REITs such as Terreno Realty, Rexford Industrial Realty and National Retail Properties acquire and own such properties but not as a primary focus. Such holdings make up 10% or less of their holdings.
And publicly traded REITs have acquired only about $309 million of properties in the past five years with criteria similar to what Alterra is targeting, according to CoStar data. But their activity is growing. They acquired nearly $130 million of similar properties last year, up from $37 million in 2018.
Other institutional and private equity funds too have acquired such properties but as a smaller part of their portfolios. Their five-year total came to about $433 million, according to CoStar data. Their 2019 volume of $155 million doubled their average annual volume of the previous four years.
“If you think back 10 years, single-family homes were not an institutional asset class,” Addimando said. “Go back 20 years, mobile homes were not an institutional asset. If you go back 30 years, self-storage was not an institutional asset class. We strongly believe this is the next new category of real estate to become less fragmented and more institutionally owned.”
Since forming the joint venture, the group has already acquired four properties. The latest was a $4.2 million purchase of 3800 N. Powerline Road in Pompano Beach, Florida. Maxim Crane Works sold and leased back the 3.37-acre property with a 14,000-square-foot building.