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Is industrial outdoor storage next to go institutional?

JPMorgan-backed Alterra just raised over $500m for its first fund focused on a niche industrial product type.

Industrial continues to be the most sought-after real estate asset class as investors and managers alike chase continued growth buoyed by e-commerce demand.

Institutional demand has also been rising for strategies that are adjacent to the more typical investments in warehouse and distribution facilities. Alterra Property Group, a Philadelphia-based manager, has closed on $524 million in capital commitments in its first commingled fund focused on industrial outdoor storage properties, PERE has exclusively learned. The firm, which has been active in the niche space since 2016, initially targeted $400 million for Alterra IOS Venture II when it began marketing the fund last summer.

“You’re going to think of outdoor industrial storage as another institutional real estate category,” said Matthew Pfeiffer, managing partner and chief investment officer.

Estimations for the size of the IOS market are around $200 billion, a similar size to the cold storage sector, but with no institutional ownership, he told PERE. The firm’s first institutional vehicle in the space was a $300 million joint venture with JPMorgan in 2020. The fund was the next logical step in its growth.

“The reason for launching a fund was this is a multi-decade bet for Alterra,” Leo Addimando, founder, managing partner and chief executive officer, said. “We think this emerging asset class will follow a similar path to the emergence of self-storage, manufactured housing and even single-family rental. A highly fragmented, large asset class that’s national and will be institutionalized over time.”

Industrial outdoor storage is defined by the firm as akin to “back office” real estate, supporting e-commerce, infrastructure, construction and logistics businesses. They are used to store all types of equipment, vehicles, building materials and containers these companies need, according to an investor presentation shared with PERE. These storage facilities are typically clustered around major US cities, as is typical of industrial zoning. This prohibits the assets from being scattered, which facilitates institutional aggregation, Addimando said. Industrial zoning restrictions also limit supply, creating stickier tenant bases.

An IOS property Alterra owns in Union Pike, Hatfield Township, Pennsylvania

The physical profile for industrial outdoor storage is that less than 25 percent of the land is covered by a building. The types of properties Alterra targets are between 5,000 and 100,000 square feet on two to more than 30 acres of land. A unique investment quirk of the real estate is that its price is typically per acre as opposed to per square foot. They also require low amounts of capital expenditure and many can also be double- or triple-net-lease properties. Alterra looks for deals in the $5 million to $20 million range, flying below many institutional radars.

“This real estate is as important to the function of half of our economy as the warehouses themselves,” Addimando said. “Yet institutional capital has never really got its footing in it and understood what the real estate is and how valuable it is, how inextricably linked it is to the overall supply chain.”

Both Addimando and Pfeiffer believe they have raised the largest fund to date targeting the niche sector but other institutional players are sniffing around the space. New York-based Thor Equities has made purchases of two properties in Southern Chicago. Los Angeles-based Thorofare Capital, a debt manager with over $1 billion in assets under management, has been lending against the property type since 2020. The largest competition comes from JPMorgan which in February launched a $700 million joint venture with Zenith IOS, a Brooklyn-based platform focused exclusively on the asset class now that Alterra is raising third-party capital.

Alterra is invested nationally, with 100 properties in 27 states. The portfolio is approaching $1 billion and the purchasing power of the new vehicle should allow the firm to invest a further $1.5 billion into the space. The discretionary nature of Alterra’s capital makes sellers comfortable as the firm is ready to buy immediately, Pfeiffer said. He is hopeful Alterra’s ability to move quickly in the market will allow it to keep its lead as one of the early movers in the space.

“It’s not easy to break in. You need to have the infrastructure in place to close a high number of transactions,” Addimando said.

Park Madison Partners served as the exclusive placement agent for the raise.