If you ask your average institutional investor where they see future growth, the answer is more than likely to include industrial or residential, or both. Unsurprisingly, capital formation and deployment volumes for these asset types has gathered momentum. Global commercial real estate investment reached an annual total of $1.3 trillion in 2021, according to CBRE data. Around 37 percent of that was in residential assets and 21 percent in industrial. The two asset classes represented 87 percent of the capital raising done in 2021, according to PERE data, garnering $48.6 billion of the almost $56 billion raised last year for sector-specific strategies.
But as these much-favored sectors become increasingly crowded with competitors, related niche strategies have consequently gained greater attention. One recent example of such an ancillary strategy is industrial outdoor storage.
The niche industrial sector consists of properties that have less than 25 percent building coverage and typically are used to store everything from logistics vehicles to cargo crates. It benefits from the continued growth of e-commerce, which has now eclipsed 20 percent of total retail sales, because of the need for companies to be closer to their customers, Zachary Harris, director at brokerage firm Stanley Johnson, told PERE.
Managers entering the space are looking to capitalize on already solid rents and prospective growth. In the US, national industrial rents grew 11.3 percent annually, closing at $7.11 per square foot at the end of last year, according to a report from JLL. Industrial outdoor storage properties in the US have seen average rents of $10.90 a square foot nationally, with that jumping to more than $13 in the Southeast and Southwest. Harris said firms are underwriting between 5 and 10 percent rent growth, too.
Certainly, the acceleration of trends since the start of the pandemic has turned many previously alternative asset types into main food groups for many investors. But does this surging interest in alternative strategies exemplify a more ominous consequence of a market where capital is funneling into too few segments: style drift?
For example, Alterra Property Group, a Philadelphia-based manager staking its claim in the industrial outdoor storage sector, closed on $524 million in commitments for its first commingled fund targeting the strategy last month. The firm had previously been active in the space via a $300 million venture with JPMorgan.
But industrial outdoor storage has not always been Alterra’s chosen sector. When the firm was formed in 2005, its original focus was multifamily. It did not begin investing in the niche strategy until 2016 and even today, the IOS sector market has little institutional ownership.
How many investors thought about investments in this offshoot when they first determined their allocations to the logistics sector? Probably not many. This is a definition stretch that will need some institutional level track record for the emerging sector to be validated. Until that happens, these niche strategies are not to be considered the same as the highly in-demand sectors to which they are tied.