Comprising uncovered lots for storing vehicles, equipment or materials, industrial outdoor storage (IOS) is considered “mission-critical” for logistics and industrial tenants, and is quickly emerging as the next upcoming asset class for investors.
Fulfilling a strategic role in making businesses easier to run and often proving essential for day-to-day operations, the segment has largely been overlooked by institutional investors to date due to its fragmented nature.
Is that about to change? Increasing interest from niche-focused real estate firms suggest that tradeable portfolios with a “critical mass” of assets may be just around the corner in Europe, as is already underway in the US.
NW1 Partners, a real estate investment management boutique, formed its first European IOS fund in September 2021 after identifying the potential of this growing segment. NW1, which is based out of London in the UK and Chicago in the US, was launched in 2016 by industry veterans David Boyle and Brad Beanblossom to focus on small-cap niche asset classes where opportunities arise to create institutional-grade portfolios of scale.
Says Boyle: ‘When we created the company, we looked at what had done well over our long careers and quickly saw that small-cap aggregation strategies always outperformed our underwriting.
‘We can make money on the buy – we are buying smaller assets – and we can make money on the value add. Ultimately, we are creating a coherent institutional portfolio with the end goal in mind. We are in the packaging business essentially for institutions.’
Last mile focus
NW1’s first moves in Europe were in the last mile logistics space. The firm launched a vehicle and assembled a portfolio that it exited at the end of 2020, outperforming expectations. ‘During that period, we were also investigating other last mile opportunities in different geographies. We identified a lag in ecommerce penetration in the Spanish market which we thought would quickly pick up, and entered Spain successfully in 2020.
Take-up has been tremendous there with ecommerce doubling overnight and a general lack of logistics property to support it. We closed a Spanish vehicle at €115 mln with a focus on acquiring, redeveloping and developing in Spain, mostly in Barcelona and Valencia, while we are also investigating opportunities in Madrid.’
Boyle adds: ‘At the end of the day, in Spain, we are creating a plug-and-play institutional portfolio to sell to an institutional buyer. The Spanish market continues to outperform – we are seeing double digit rental growth, and the Spanish economy has held up pretty well over the last 18 months.’
For the Spanish market, ESG is an important focus. ‘We’re doing a forward-purchase in Valencia at the moment, which will complete in September with a BREEAM Excellent rating, and will be net carbon neutral. We also carried out a redevelopment in Barcelona to a BREEAM Very Good standard. We are extremely focused on making sure we can deliver the highest standards possible. We know that buyers and occupiers care about that and it is the right thing to do.’
Five years ago, NW1 started researching the IOS niche. ‘It’s an asset class hiding in plain sight,’ says Boyle. ‘On every industrial estate there is IOS – it’s a very important part of the economy. It serves ecommerce and transportation, it’s important for fleet maintenance, parking, distribution, and the rapid through-put of goods through the supply chain. It’s also used by the infrastructure and construction industries that are essential to every economy. The latter use it for storing piping, scaffolding, and materials, for example.
‘But the key that ties it altogether is the criticality of the location. This is what can make it “mission critical”,’ Boyle emphasises. ‘Occupiers need to be in certain areas to do their business, and it can be a significant cost to their business to have to shift away. Being 20 or 30 miles further out for many businesses just isn’t going to work in terms of fuel and employment costs.
‘If you look at typical industrial and logistics tenants, rent is a very small part of their overall cost structure – it can be as little as 3-6%. Other costs are much more onerous, which means they are willing to pay more rent, and are less sensitive to rent rises to be in these locations.’
Another crucial factor driving the rise of IOS is its complex supply story. ‘IOS is declining every year,’ he notes. ‘It’s getting converted to last mile logistics, self-storage, even residential. The supply side is dwindling and there is very strong demand growth.
‘The new driver on the logistics transportation side is the rise of EV charging for fleets, which is so important for environmental, social and governance (ESG) metrics.
‘We are working with a lot of tenants who are thinking about power, and helping tenants get the right infrastructure and be compliant with their carbon goals and local regulations. After 2025, vehicles won’t be able to enter many city centres in the Netherlands with regular engines. It’s happening fast and it’s happening now.’
IOS’s origins story
According to Boyle, IOS first became classified as an asset sub-section in the US, where NW1 has invested across the market with major exposure to date in Southern California, the Midwest, Atlanta and New York. The firm saw an opportunity to extend this strategy to the UK, where it now has seven IOS properties on its way to create what Boyle hopes will be a ’20 asset portfolio’. The focus is predominantly on Greater London and the Southeast.
‘Recognising the success in the US and UK, our next target market is the Netherlands, where we are sponsoring a vehicle with a view to accruing at least a 40-50 asset portfolio over time. Again, we love the supply dynamics there, and see the Netherlands in general as an extremely strategic market, alongside the Port of Rotterdam and Schiphol Airport, which is a gateway to the rest of Europe.’
Boyle acknowledges that IOS assets tend to be small ticket items, but that’s part of the appeal. ‘We can buy them off market, the sellers are generally more fragmented so we can get better prices. Time and time again, we see that institutional investors don’t want to do a €10 mln deal for the same effort as a €100 mln deal. But that’s why we have less competition for these spaces. We are typically buying IOS properties for prices between €5-€15 mln.’
While NW1 is currently focused on the UK and Dutch markets for this strategy, Boyle says they are also looking at parts of Germany and potentially the Nordics. ‘We like where we are now,’ he says.
While in the US, NW1 has also invested in into hotels and multifamily, Boyle thinks that logistics is a better play for their European business. ‘In my experience, the best time to invest in hotels is after a major demand shock, such as the Global Financial Crisis or Covid. However, we have been looking at niches like glamping, light-touch hospitality, which would be easier to get into from a perspective of capital intensity. Meanwhile, residential has a politically sensitive dimension which doesn’t always make it easy to manage.’
Looking beyond the firm’s current convictions, Boyle says that NW1 will consider further industrial and storage segments in the future. However, life sciences and data centres aren’t immediately on the radar. ‘With life sciences, I think you have to be deep in that market and be operationally successful; data centres are in that category too. It is very capital intensive.
‘We prefer to focus on segments where we are clear on the execution and the risk. Now, self-storage is again fragmented, with lots of roll-up potential, and we will continue to explore other markets for IOS. Canada might be one of them. Right now, however, we have plenty to do in the UK, the Netherlands, and the US!’