Logistics real estate has been one of the great success stories of the past decade, with its expansion driven by seemingly inexhaustible tailwinds: growing wealth and global trade, urbanization and the phenomenon of e-commerce; even a devastating pandemic acted as a catalyst rather than a brake.
However, the sector’s popularity has sent average yields in developed markets below 5 percent, and even lower in markets such as Tokyo, where prime logistics yields are under 4 percent. This has led to some easing of pricing and to increased appetite for niche sectors which have some of the same drivers but also offer diversification and higher yields.
Cold storage, industrial outdoor storage and self-storage are niches that have attracted increased attention in the past couple of years. None of these are new, but they have not been universally recognized. Self-storage has been established in the US for decades and for a fair while in the UK, but it is far less institutional in Europe and Asia, where the market is fragmented.
JLL predicts that annual investment in cold storage facilities in Asia will grow to $5bn by 2032
Similarly, while there are cold storage facilities all over the world, many are owner-occupied and have only recently attracted investment from real estate players.
Industrial outdoor storage is even less institutional and even more fragmented; the institutional investment market is nascent in the US and scarcely a glint in a manager’s eye in Europe and Asia-Pacific.
The existence or scale of a return premium to modern warehousing varies from market to market, but managers consider these niche sectors to have value regardless. Rosie Hunt, real estate research analyst at DWS, says: “Niche logistics sectors, such as cold storage, historically traded at a yield premium of around 100 basis points over standard logistics.
“However, in recent years the yield gap was narrowed. While there may still be the opportunity for higher entry yield, the main driver of higher returns is likely to come from rental growth, given strong demand and supply constraints.”
As in most niche real estate sectors, these storage sectors require a certain amount of specialist knowledge and in some cases a greater operational element. They also tend to be more opaque, with far less widely available data regarding tenant and investor activity.
Locking on to self-storage
Self-storage has proven its resilience and is less developed outside North America and Western Europe, offering investors an opportunity
US investors are no strangers to self-storage and a number of the world’s largest operators, such as Shurgard, have spread into Europe, but the market remains fragmented in Asia. Meanwhile, continued urbanization provides a tailwind even in developed markets.
Kim Hourihan, global chief investment officer at New York-headquartered CBRE Investment Management, says: “Something we like about self-storage is that the demand drivers are really non-cyclical and uncorrelated to the economy. It is more related to the personal situation of customers than anything else.
“Significant factors in the US include household disruption, population shifts, increased consumption, having more possessions. It is more or less the same for Europe and APAC. Apartments are expensive in global gateway cities; self-storage is cheaper than an extra bedroom.”
Many real estate professionals would be inclined to see self-storage as somewhat divorced from the wider logistics sector. However others take a different view. In October, Dutch pensions manager APG and Singapore’s CapitaLand Investment formed a S$570 million ($429 million; €398 million) joint venture to acquire Extra Space Asia, an operator with 70 owned and leased facilities across six Asian gateway cities – Hong Kong, Kuala Lumpur, Seoul, Singapore, Taipei and Tokyo.
Announcing the deal, Patrick Boocock, chief executive officer of private equity alternative assets at CapitaLand, said: “We view the self-storage platform as an extension of CLI’s logistics platform, well-positioned to capture the increasing demand for flexible storage and last-mile delivery requirements in tandem with the growth of e-commerce.”
Self-storage facilities often use older industrial and logistics facilities or are in similar locations. Smaller e-commerce companies often use self-storage as their warehouse, creating demand for 24/7 access and security. Managing SME and consumer clients means the operational demands are greater than for warehousing, yet operators increasingly use technology to save on running costs.
Hot on cold storage
Cold storage is an established logistics niche, but one in which interest grew dramatically during the pandemic. Increased demand for grocery and food delivery plus the requirement for vaccine storage piqued interest.
Meanwhile, in developing markets, rising prosperity continues to drive demand for fresher, better-quality food and the cold chain required to support this. There has also been consolidation amongst operators, which has sparked some sale and leasebacks and made a previously fragmented market easier to negotiate.
Kim Hourihan, global chief investment officer at New York-headquartered CBRE Investment Management, says: “Cold storage demand is growing worldwide due to increased demand for perishable food and more grocery delivery. Supply is constrained because it is expensive to build, so there are supply and demand tailwinds. It is akin to last-mile logistics in that it tends to be in more urban locations, nearer to consumers.”
“Outdoor storage is really a big US phenomenon but you can’t help but think that it is going to be a trend as you go across the globe”
CBRE Investment Management
The requirement for fridges and freezers adds to the fit-out cost of cold storage, although this might be taken on by the tenant, especially if it has signed a long lease.
As well as offering higher yields than warehousing, cold storage is also seen as a resilient sector in the face of a global downturn. “The cold storage sector is supported by strong fundamentals,” says Hunt.
“Demand is growing, led by occupiers considered more ‘resilient’ in the face of economic headwinds such as food and pharmaceutical. Supply is also typically very constrained. With typically long leases and a ‘sticky’ tenant base, the sector has many attractive qualities.”
Many investors in the broader logistics sector have cold storage as part of their portfolio. “Cold storage is something you want as part of your logistics portfolio, as a diversifier,” says Hourihan. However, there is a growing number of specialist cold storage strategies.
In September last year, UBS Asset Management joined forces with Dutch pension fund manager PGGM and a group of family office investors to make an initial $700 million investment in developing cold storage facilities in the US. The new venture will construct build-to-suit cold storage facilities across major food and transportation hubs across the US.
In May, private equity firm Bain Capital and Texas real estate developer Barber Partners launched a $500 million fund to build cold-storage facilities in high-growth US markets.
Meanwhile, in Asia, JLL predicts that annual investment in cold storage facilities will grow fivefold to $5 billion by 2032, with India, China and Australia leading growth. In 2021, investment manager Blackrock announced that it had invested in Chinese cold storage facilities developed by cold chain operator Metcold.
The great outdoors
Industrial outdoor storage, often abbreviated to IOS, is perhaps the newest niche in the industrial and logistics sector, yet it has been in existence as long as logistics properties of any sort. These yards are used to store vehicles, trailers, construction equipment and materials as well as anything else that can be left outside. Some facilities will also include a building that may be used for maintenance purposes or other storage.
Matt Pfeiffer, managing partner at Philadelphia-based manager Alterra, a pioneer in institutionalizing the sector, estimates it is worth $200 billion in the US alone, but ownership is fragmented among a multitude of owners. Lot sizes are small, generally under $10 million, but facilities might cover two to 30 acres. Yards are leased per useable acre – somewhat different from mainstream logistics uses.
Alterra recently raised $524 million for its first fund. Other US managers, such as Brooklyn-based Zenith IOS, a sector specialist backed by JPMorgan (which previously invested alongside Alterra), are beginning to enter the market, too.
The sector is at an even earlier stage in Europe, but UK managers Moorfield and Peloton Real Estate have formed a £100 million ($122 million; €113 million) joint venture, and Delancey-backed NW1 is understood to be looking at the sector. Outdoor storage exists everywhere warehousing does, so can be found in Asia-Pacific too, although there ownership is even more fragmented and opaque.
Hourihan says: “Outdoor storage is really a big US phenomenon but you can’t help but think that it is going to be a trend as you go across the globe.”
“It is easier to finance a pool of assets than a series of one-offs”
“Demand is generated by logistics and e-commerce but also infrastructure,” says Pfeiffer. “The IOS segment is supply constrained due to zoning restrictions that limit where these heavy industrial uses can be located within a market.”
He adds: “Leasing velocity has been strong in the IOS space as a function of supply and demand. We are typically able to aggregate wider cap rates than traditional industrial.”
The assets require very low capital expenditure, which does not need to be tailored to a particular tenant, and almost all sites have only one or two tenants. However, Pfeiffer says: “You have to peel back the onion to figure out what actually is the rent per acre, and that is how tenants make decisions in this space. Triangulating the market rent is very complex, due to the fact that it is not tracked on national databases, in contrast with traditional industrial.”
A further complication is financing, which can be “nuanced and complicated,” says Pfeiffer. “It is easier to finance a pool of assets than a series of one-offs.” However, he says the sector is like manufactured housing. “The assets don’t look good, but the returns do and lenders will come to appreciate the low capex nature and durable cashflows.”