You Ain’t Seen Nothin’ Yet: Industrial Outdoor Storage Takes Off

A decade ago, one of our guests got a call from a friend in the heavy equipment business asking for a favor. One thing led to another, and soon, a new asset type was on the road to stardom as an institutional investment class. On this episode, we'll hear the whole origin story and learn where the opportunities are in the space known as IOS, that is, industrial outdoor storage. We think of IOS as industrial back office. We also like to call it infrastructure real estate hiding in plain sight. That's Leo Adamondo, founder and managing partner of the Altera Property Group. This 21-year-old real estate platform is based in Philadelphia and has emerged at the forefront of the iOS business. Altera iOS currently has a coast-to-coast footprint of around 400 properties. If you look at the amount of capital that's being invested within iOS, the groups that are investing that capital, it's a completely different business than it was five years ago. And that's CBRE's own Will Pike. Will is the president of U.S. Industrial and Logistics Capital Markets and leader of CBRE National Partners. He also heads CBRE's Net Lease Property Group and Corporate Capital Markets Practice, all of which, of course, includes CBRE's coverage of iOS. Coming up, we head back into one of the most popular topics we've covered over the last year and dig deeper into the market dynamics of iOS, industrial outdoor storage. I'm Spencer Levy, and that's right now on The Weekly Take. Welcome to The Weekly Take, and we are delighted to be here talking about iOS, industrial outdoor storage once again, because it may be the hottest sub-asset type in real estate. And to join us today, we have Leo Adamondo. Leo, thanks so much for coming out. Thanks for having me, Spencer and Will. And then my good friend, Will Pike. Will, thanks so much for coming out here. Spencer, thanks for having me again. Look forward to this conversation. So Leo, as I mentioned in the outset, iOS may be the hottest sub-sector, and you were an early mover in this sector a long time ago. Just first, define how you would define iOS and why do you think it's become so popular? It's interesting. We think of iOS as industrial back office. We also like to call it infrastructure, real estate, hiding in plain sight. It's effectively low density industrial where you're not focused on the warehousing. You're not focused on manufacturing, but you're focused on the products and the vehicles and the services that effectively power the economy and help us to maintain and construct infrastructure in this country and in the whole world, actually. You were an early mover in this space over 20 years in the sector, but you also not only are an early mover in this sector, you helped shape to some degree where the sector is today. Why don't you tell us the origin story of Altera and kind of how you shaped iOS? Sure. So Altera started under a different name 21 years ago. We're Philadelphia-based to this day. We spent the first 11 years really doing mixed use multifamily development, a lot of historic conversions in the Philadelphia marketplace. 10 years ago, we got a phone call from a dear friend of mine named Frank, who at that time ran a crane company and he was buying another crane company that he had used to run. And they had a real estate problem in Boston. They were being evicted from their crane yard and they did a lot of business in the Boston market, still do actually. And he said, hey, I need you to figure this out and relocate the crane yard. And I said, well, Frank, I don't know anything about Boston real estate. I know less about crane yards. He's like, well, you went to business school in Boston. So anyway, as a favor to him, I went to Boston and sort of just got to lay the land and realized that there was definitely a supply demand imbalance. And after several months, we managed to find an opportunity to move them from the south end of Boston to Revere, Mass, just north of Logan Airport. We then did a series of other relocations or consolidation build the suits for them around the country. We then at that point in time started to create a team, hired some people. My partner, Matt, runs the platform. He put his hand up seven years ago and said, I want to do this full time. And we put a box around what iOS was and what it wasn't. We then came up with the moniker iOS. And since then, really have gone on roadshow after roadshow of talking to banks, doing lender roadshows, doing institutional equity capital roadshows, doing pension and endowment roadshows, talking to anyone who will listen about iOS, even if there's no chance they're going to partner with us, invest with us, or loan money to us. Because from our perspective, the more the market understands what it is, the more they're eventually going to grasp just how attractive it is on a risk-adjusted basis. So it's been a 10-year journey. Well, I really believe this is the hottest subsector in real estate, maybe even inclusive of data centers. Why do you think it's become so popular? Yeah, that was one Leo's overview of the market is exactly the way we see it as well. And why it's become the most popular, if you still look at the overall ownership, and Leo knows this very well, it's still very much privately owned. So there's a major runway for large institutions, REITs and groups like Leo's, to really put some scale to this business and institutionalize it, which it has over the last couple of years, to where it's a zone stand-up vertical within commercial real estate. So we think there's a ton of runway. When you say stand up vertical, let's just be clear. I mean, I think what we're saying here is people saw the ability to turn it into an institutional space or make it more institutional. Is that the reason, Will? Yeah, that's right. When you look at, quote unquote, alternatives within commercial real estate, it's iOS became an acronym that people, as Leah was joking about a minute, getting accustomed to and understanding the infield nature of it. what's the highest and best use, and that's changed over time, right? Now it's more of an infrastructure use primarily. And yeah, like if you look at the amount of capital that's being invested within iOS, the groups that are investing that capital, yeah, it's a completely different business than it was five years ago. It's the way we see it at least. Leo, I took an opportunity prior to today's call to take a look at your portfolio, and you're everywhere. If I read it correctly, you're in 38 different states. And could you give us a sense of where you're located within these states? And you've mentioned infrastructure adjacent. Are you in your train lines? Are you in your ports? Is that kind of your optimal site? Or do you go further afield than that? Yeah, I think that location is obviously very important in real estate. It's no less the case in iOS. We tend to be three to five miles from the port, the interstate, the intermodal, or the airport. And the reason for that is our tenants and the iOS tenants in general, their single biggest cost of doing business is transportation. So they are very sensitive to location. Things that might seem on a map to be an easy move or relocation from five miles east to five miles west or for another five miles west if they get priced out of a sub market on a renewal, it can be detrimental to a tenant's ability to deliver their products and services in a cost effective manner to their customers, but also to their workforce retention rates. In today's world, it's not just in iOS, but I think one of the biggest challenges that all middle market industrial companies and companies that actually need physical workers present with certain skills, whether it's truck drivers or operators of equipment, or frankly, even just workers in a relatively low skill distribution center. The reason why tenants are so focused on location is not just their own transportation costs, but those of their employees as well. Yeah, the way we look at it is we look at it, let's say an iOS user that roughly two thirds to three, 75% of their actual costs are in that transportation. Is that kind of how you see it as well in your data? The way you look at your when you're talking to your tenants? Yeah I think we actually use some CBRE stats So you would know better than I would We peg it at like I always doing research people Right Okay We say 50 transportation 20 25 labor and the cost of occupancy is sub 5 And so that the other part of the story in terms of their cost of doing business, which is the real estate is so important. It's like binary in terms of where they can locate, yet it's a small piece of their overall cost of doing business. But I didn't ask you your full question, Spencer. The reason we're in 38 states, it's not because we necessarily want to be in 38 states or 50 states. I mean, we'd love to be in all states. Ultimately, the demand generation for iOS is population growth. Places where you have population growth and or existing population density, okay, are places that can generally support the kind of tenants that we're looking to attract, where we can find the kind of properties that they're looking to occupy. And so the three to five miles from the port, the interstate, the intermodal, you're really looking at population centers and population growth centers and migration patterns. And so we have looked in all 50 states, but there has to be a certain critical mass of people there or moving there or other business reasons to be there. There's a big boom in digital infrastructure investment right now. Okay. And everyone's seeing it, data centers on down, right? And some of those data centers and some of the other components of the digital infrastructure, because it's not just data centers, okay, it's power generation, it's water, okay? Some of those centers of activity are also proximate to population centers. Some are not. They're far afield. We don't go chasing opportunities that have this binary demand generation today because everyone's building data centers. But we have marketed to and have had a lot of success with digital infrastructure related tenants or direct tenants. But they're renting the kind of iOS properties that we already own or are already looking to acquire in markets that we have conviction in. It just creates an additional tailwind of demand. Let's compare and contrast for just a moment traditional warehouse distribution centers to iOS from a capital markets perspective. I think there's been a huge shift now in the valuation community that they are now saying we're going to look at this more akin to warehouses, which has gotten more institutions involved, which has made crisis appreciate. How do you see it, Will? Let's break industrial into a couple of buckets, right? So light industrial can be all over the country, obviously, but industrial, you know, due to NIMBYism and others, is frankly pushed further out when you're talking about wide-scale distribution. I'm talking about buildings, five, 700,000, a million plus square feet. And those are obviously going to be underwritten based on weighted average lease term, basis, clear height, et cetera. And that's kind of on the light industrial and then more bulk. Okay. So then manufacturing, to me, that's a totally different subset, right? Not as quite as focused on location. There's a whole host of reasons. Then the iOS sector is driven by, literally, it's kind of old school real estate, right? Like location, location, location, how the trucks can access, what is occurring within that population center. So the capitalization rates in general, right, in our sector can vary widely based on a whole number of inputs that we just discussed. But I would say the primary difference is ease of transportation in iOS is at the forefront. Very important to distribution in the bulk sector, but I would say it's not as primary. Light industrial, those are different type of users, more localized. So I hope that answers your question. You know, when we started in this business, appraisers were looking at rents on a per square foot basis and had no idea that the land was where the value was. But you have to have a building, okay? Much like Will said, we really pretty much won't buy a property that doesn't have an existing building that is functional or can be made functional unless it's a kind of greenfield build-a-suit with tenant and zoning and entitlements all locked up before we go really at risk. And those are, it's a very small percentage of the iOS world in general, okay? So appraisers were valuing it the wrong way. So it was hard for institutions. If appraisers aren't on board, then lenders can't get on board, then institutions can't get on board. It's kind of funny. So the education process of the appraisers going back 10 years has been a process. But I think now people understand and appraisers understand there's enough data out there to be able to substantiate that it's per usable acre of land checkbox, there's a functional building. Therefore, I can go back to the per usable acre of land. And then you get into the improvements in location and the ingress and egress and all that kind of stuff. Okay. So if you look at the institutionalized iOS sector versus the fully institutionalized warehouse distribution, traditional industrial sector, right? Borrowing costs are about 50 basis points wide for iOS. The valuations are probably 25 to 50 basis points wider than traditional industrial. But I think that what you're seeing is that has narrowed from 150 basis points down to 50. And it's gotten very close to being on top of a traditional industrial for certain slight transactions and certain slight markets. And I think that the difference in the supply and demand story between iOS and traditional industrial and the institutionalization of the sector, equity, debt, the whole capital stack, I think brings the two categories on a collision course. I'm obviously biased, but I will say this. One of the most beautiful things about iOS, And it's not beautiful in a traditional literal sense. It's actually unsightly in some cases. It's the kind of real estate you kind of like, you know, hey, I own the Four Seasons. No, actually, I own that yard over there, right? I don't know. The yard is, on a net basis, probably much more profitable. But the Four Seasons is more fun to stay in and even point to it and say, I own the Four Seasons. But anyway, back to the yards. The yards have almost zero functional obsolescence risk. They're the exact same specification or lack of specification, buildings and land parcels and improvements as they were 50 years ago. Now, are there things like how much power do you have and how does that relate to e-IOS users, which is another buzzword nowadays? They're also resilient. So if you recall, we had two hurricanes come through the southeastern part of the country in the fall of 2024. I think one went sort of Gulf up, one went Atlantic down. We had 70 properties that were in the path of those two hurricanes. We didn't have single insurance claim. So they're climate resilient. When you have vacancy, you have very low carry costs because you have low taxes and low insurance costs. And the need for iOS is not just tied to the need for warehouses, but it's also tied to the infrastructure of this country. Logically, pricing of the two categories should converge. What percentage of this space hasn't been institutionalized yet? It might be adjacent to a warehouse. It might be adjacent to a manufacturing site. And doesn't that create some of the opportunity to be able to separate the ownership from the user. We suspect anecdotally and through our 10 years of being in this market intensely, and also some of our own data we do have, which is a pretty large data set, is probably the largest, definitely largest in the iOS sector, that less than 10% of the total iOS universe, whether you think it's 200 billion or 500 billion, is truly institutionally owned. There are some large institutional owners, just name a couple. Penske, Miller's first source. They like to own their own real estate. Penske is a private company, very profitable. They realize that it's a key differentiator and asset and competitive advantage. But the rest of the iOS tenant universe, sometimes they own, sometimes they don't own. Some never own. Kind of depends on their corporate history and how they were constructed. There are a lot of roll-ups of these businesses nowadays, and those have some real estate that sort of came along with various acquisitions along the way. And so we're definitely trying to insert ourselves whenever possible between the operating business and the real estate. And that's just one of the fundamental kind of investment theses and strategies. Another thing to keep in mind and I think this is what been driving iOS in conjunction with shallow and light industrial over the last two years if you look at trades in demand is the frankly the ability to develop right There are major constraints on development for this product type, which is obviously a big thing. You can look at other adjacent asset types like parking as the next iOS opportunity. Any thoughts there, Leo? Yeah, it doesn't have the proper zoning. It's something that we struggle with around the country. People are trying to sell us properties and they're like, work on parking trucks here and there's a building. It's like, yeah, but you're parking trucks there illegally. And at some point in time, the township is going to wake up and just enforce the zoning code. So commercial zoning does not work for industrial outdoor storage in the institutional way that we understand it and that we invest in it. Also, we don't buy parking. We buy properties that allow you as a component of what you do there to park vehicles or other heavy equipment. But it's zoned industrial. It's not zoned commercial. That's a key differentiator because the number one risk in the iOS sector is zoning. Number one. It's number one. It's number two. It's number three. It's number four. And it's number five. I completely concur. And I think if you take two steps back, you look at the broader industrial landscape, what occurred? Look, we all love getting our Amazon boxes in my house, at least almost daily basis. If you look at the retail distribution that was built out from the early to mid-late teens up until a couple of years ago, today you would not be able to replicate that type of development as closer into the city centers. That's just a fact with what's occurring. So zoning, going back to the question that you asked, Spencer, and I completely agree. Zoning is the most critical component of iOS that's primarily one, two, and three. And yeah, it drives it and that's a differentiation. It's kind of like the life science craze from five years ago, or, you know, where we talk about power incessantly for buildings now. There are a lot of iOS opportunities out there that Leo just joked about that are iOS adjacent. There's been a lot of cannibalization of naturally occurring iOS around the country for vertical industrial development. We've got a really good handle on which of our properties have underlying zoning for self-storage, for multifamily, believe it or not, for data centers, for, I'm forgetting a couple of other categories that we track. And what we've come to realize is that well over 95% of all of our properties, if they were properly located, which they usually are, and they were properly shaped geometrically, which most but not all are, we could do vertical industrial development. The inverse is not true because the zoning doesn't allow for the primary use for outdoor storage. So, I mean, we pretty much will not buy a property that doesn't have zoning for at least a number of the core iOS use cases that we look for. And that's because we've seen it play out time and time again that getting zoning relief, getting the right to a variance or a zoning change or a text amendment, okay, to do iOS on a property that's not zoned iOS is incredibly difficult. Public enemy number one is data centers. which by the way is actually creating great air cover for iOS because all of a sudden we're seeing this better than that, which is incredible. Okay. Number two is waste. Okay. Number three is probably another Amazon facility. I'm just picking on Amazon, any big distribution center, right? All the trucks and the noise and then iOS. But none of those things come easy. Okay. And because the underlying value of the real estate in iOS, if it has the underlying zoning for something else might be greater, there's constant cannibalization incentives. So Will, as your role as president of industrial capital markets in the US, you track money going to all different segments of industrial and industrial adjacent. And could you just walk us through how the institutional mindset has changed the last couple of years towards iOS and how much greater, how much deeper that marketplace is? Well, it's completely different and pretty easy question, frankly. Every major allocator of industrial has essentially some type of initiative or capital allocated towards iOS. I can't really think of any major industrial landlord that does not have some iOS component or strategy around those assets. So it's completely different, actually, from five, 10 years ago. One thing we haven't touched on, Leo, is these buildings are obviously older stock as well, right? The majority of the inventory is built before 2000. It's just different. And so Leo, given what Will said, what are you doing? What is Altera doing to try to be more attractive to users for your facilities versus perhaps somebody else? I think one of the challenges in engaging with the iOS user tenant base is that they tend to not have the same level of staffing and organization around their real estate component as traditional industrial tenants do. It's a lot of calling people, going to conferences, visiting them in person. But there's a tension there. It's also using our data to try to be helpful when possible. OK, covering the whole country allows them to call us. If there's three people in the real estate department, they have 500 properties. they don't have time to go find a property between Dallas and Fort Worth. It'd be hard for them to know who to call, what brokers to call, because it's a different set of brokers than the ones that transact in investment sales into a traditional industrial, because the ticket sizes are a lot smaller, right? So they call us, and we can be helpful. And sometimes we already have a property, or sometimes we don't have a property. Sometimes they call us, and they say, hey, we have this landlord. They're hard to deal with. We need to invest capital into the facility. We don't have budget for it this year, but it's hurting our business. They won't invest the capital, but you try to buy it and then we'll make a deal with them. So we do that a lot. So a lot of it now, it's 10 years of meeting users kind of where they are. We also have a significant number of our team members that used to work at iOS users. So putting yourself in the shoes of the user, I think, is an important part of building that relationship. Now, the flip side is we're in the business of buying property and raising rent, okay? And that's not lost on our tenants. So that relationship, it can run hot and cold sometimes. And I think the tenants that we do really well with and for are the ones that know that sometimes they got to give us something and then sometimes we got to give them something. And they don't look at each negotiation as a binary outcome. They look at it as a continuum of a relationship conversation. Ultimately, we're in a B2B business. Our true customers are the tenants. And so we have to never forget that and we try not to. The interesting thing about your tenant mix, specifically the occupiers, kind of bifurcating, correct me if I'm wrong the way you look at it. You have very corporate users and then you have kind of, I would say, mom and pops, right? It's not a lot in between. Is that a fair statement? Yeah. By the way, the mom and pops can be billion dollar businesses. OK. So, Leo, this next comment is probably going to singe the ears of Will because in addition to Will's industrials expertise, He's one of the leading net lease experts in the country as well. But one of the uses of iOS is temporary uses. How do you manage the difference between having a long-term stable net lease, which is the name of the game in most real estate, versus some of these temporary uses? And temporary uses could be construction. It could be other uses that don't have that long-term net lease nature. That's a good question. The good news for iOS landlords is that temporary is three years. We don't have any pop-up yards, for example. Sometimes we've been approached several times where a contractor needs a yard for six months. And generally, we won't sign up for that. We have done two to three-year leases before. So it's much less transient in terms of the temporary uses. We think of each of our portfolios as a continuum of WALT, business plan, which are highly correlated, tenant mix and tenant quality and of course geography So we trying to manage a rolling five walt okay because we found historically that every five years being able to get to market on a chunk of your leases a rolling basis, allows you to kind of realize that mark-to-market opportunity and generate additional, you know, value for your investors. But you raised the question of, like, construction and, you know, party tent rental. By the way, tent rentals, we don't have any of these facilities, but, like, that's an iOS use case, believe it or not. The company that does equipment for concerts and weddings and things like that, that's one of the things that people do on these yards, okay? They'll store that equipment inside, outside, the trucks, the cranes that they need to put some of these tents up. I mean, I've watched them erect some of the infrastructure for the PGA Championship at Aranamick here in Philadelphia driving by and like, they must have had 15 cranes on site. The actual operating of the golf tournament, porta-potties, okay? The cranes for the TV equipment during the tournament, the trailers for television and other on-site facilities, the temporary kitchens, the temporary HVAC, the tents themselves, all of the equipment they need from the bulldozers to the backhoes to set everything up and take everything down. It's one gigantic iOS use case, but it's not industrial per se. So I think that going back to the beginning, like the name iOS, it's really a misnomer. OK, it's the best acronym to come up with to try to put a name that rolled off the tongue. OK, and and connected it to industrial, which it fundamentally is, even though not every user is an industrial user. But there's so many different use cases for iOS. I mean, there's a services side of the business, too. So all these data centers get built. Somebody has to service the HVAC equipment and the roof and make sure that there's pest control, make sure the water quality in the water loop is maintained. All of these services providers, I bet you, Spencer, at your house, you have at least five vendors that come on a quarterly basis. Your HVAC guy, your sprinkler guy, your fertilizer guy, your landscaper. If you have a roof issue, if you have a driveway issue, if you have a kitchen appliance issue, I mean, I keep going. Leo, you touched on technology briefly. How is technology changing the nature of iOS? So from an investment perspective, we're investing a lot in taking existing software, our data, which is robust, a lot of good third-party data sources, and artificial intelligence and kind of marrying it all together. It's an ongoing process, probably the forefront of it within the iOS sector. From a user perspective, I think the availability and importance of power has been elevated. OK, it's maybe it's not just so much, you know, do I have enough power to run my business? But do I have enough power for my employees to park their cars and charge them? Do I have enough power in case some of my equipment gets electrified? So we are investing in power upgrades in some of our facilities. There are a lot of e-iOS use cases, which do require a significant amount of power. I think they're going to struggle to actually get the power because they're competing with data centers. And the fact is that most of the realistic iOS use cases that involve technological change go back to the right location, the right yard with the right building. OK, not so much technological change on the site itself. We laugh about the utilization of power. Like if someone had told me three or four years ago I would talk about power for 20 percent of my day, I would think that would seem a bit crazy. Put that in context, five, six years ago, we would spend a substantial amount of the OM talking about the energy efficiency of the building, energy efficient lighting, how basically it doesn't utilize much power. And now a big portion of our sales pitch and offering materials are focused on how to generate power to the building, access to power being in the kind of the interstate of the power. So, look, we're in a constantly evolving business. It's an interesting conversation about iOS because it has all the macro tailwinds. Where are we going here, Will? Five years from now, we look back on iOS. Where do you see the space going? Well, it's a little bit of both considering the average price point is smaller. So there will be a lot of blocking and tackling. But what we're seeing, you know, whether and I'll throw in whether it's iOS, light industrial, just kind of summarize that within Shallow Bay. groups like Leo's, kind of to your last question, utilizing technology and being able to acquire these four, five, six, seven, eight, nine, $10 million buildings in an efficient manner with utilization of AI and others. I think it's going to continue to be more an institutionalized business. That's definitely going to happen. And as far as, again, macro tailwinds of everything we've discussed, I don't see that foresee that changing at all. And again, at the firm, I'll double down on this, whether it's our research, the amount of occupier and landlord brokers that are focused on iOS, and especially within our investment sales platform, we're fully in. And Leo, last question to you. Five years from now, looking back, what do you think we're going to see in iOS? My five-year look forward is that we'll have a convergence of borrowing costs and valuation cap rates between traditional industrial and iOS. It'll slowly continue to institutional traditionalize. Some large portfolios will trade, whether they're ours or those assembled by others. And the big boys who are right now kind of have a toe in the water or have tried to sort of do it at a granular level, realize that they just have to buy scale, they'll be fully in the business of iOS, not just having allocated capital to it and trying to find a home for that capital. It'll be in the marketplace. And I think that's what it'll take to sort of tip it over to really be on par with traditional industrial from a valuation perspective. Yeah, I mean, if you think about it, if you look at the largest institutions, and if they're graded, right, whether they're talking about Odyssey or others, the groups that have fared the best, because in general, they have similar allocations to industrial office retail and multi. It's the groups that have, frankly, outperformed with the alts sectors. And if you look at tailwinds, within the alts, within commercial real estate, like iOS has more tailwinds than others. They just add it to the NACREF. And so that's a small little, but very important thing from an adoption and investment perspective. Totally agree. So on behalf of the Weekly Take, what a terrific conversation today with Leo Adamondo, the managing partner at Altera Property Group, a early mover in iOS, one of the largest owners. Leo, great job. Thanks for joining the show. Thanks for having me, Spencer. And nice to see you. And I see you too, Will. Thank you for coming. And Will Pike, the president of industrial and logistics for CBRE's fourth appearance on the show. Thank you so much for joining. Great job, Will. Thank you. And thanks to all of you for joining us as well. Stay on top of our programming by subscribing to the show on our website, cbre.com slash theweeklytake, or on the podcast platform where you listen. Here's a quick preview of what we're working on. Starting next week, we'll bring you to the Spring Crufsy event in New York, where CBRE Investment Management's Julie Ingersoll and I will rock on about none other than David Bowie. And we'll share how the late artist serves as an inspiration for thinking outside the box in business. We'll also welcome a return from acclaimed author Esther Choi, and we'll delve into the subject of persuasion. And we'll also bring things back to the bottom line with a special mid-year outlook event that takes a summer snapshot of the economy and our industry. That episode will also be available on our YouTube channel, where you can see our recording in front of a live audience. Stay tuned for all of that and more coming soon. I'm Spencer Levy. Be smart, be safe, be well.