The co-founder and CEO of Zenith IOS, Ben Atkins, has an ambitious and a somewhat unorthodox goal for his company. “We want to be,” he said, “the Prologis of dirt.”
Given its massive size — more than 1 billion square feet of logistics warehousing across the globe — being known as the Prologis of anything is aspirational for most real estate developers. That’s especially true for Zenith, less than 3 years old and looking to redefine the industrial outdoor storage (IOS) industry, a legacy business built around open-air dirt facilities that have multiple uses off traditional warehouses’ beaten paths.
Atkins said that IOS has emerged foursquare on logistics warehousing’s radar screens in the wake of COVID. In a recent interview, Atkins said that he sees IOS as a $300 billion addressable market in the U.S. alone. There are a handful of IOS development providers in the country.
Zenith, which has developed and manages 50 sites in 20 markets, has entered into $400 million worth of IOS deals within the past two years, according to Atkins. In February 2022, Zenith entered into a $700 million joint venture with J.P. Morgan Asset Management to establish IOS facilities in big cities with growing populations.
“IOS has emerged in the past two to three years as a distinct subclass within industrial warehousing,” said Atkins, whose company is based in the borough of Brooklyn in New York City. He said that traditional logistics warehousing firms like Prologis (NYSE: PLD) will become more active in the space as they embrace its untapped potential. Logistics accounts for the bulk of industrial warehousing development, with a smaller amount allocated to manufacturing.
IOS facilities are built for such diverse purposes as used car lots, self-storage, construction and equipment rental sites, and locations near traditional warehouses to place delivery vehicles. The average IOS property size is 12 to 13 acres. Individual users generally utilize about half that size range, Atkins said, noting that a tenant operating an automobile lot may require up to 10 acres.
IOS is not a new market segment. For years, open-air parcels have been used by port and intermodal providers to store rail cars, containers and other outsized assets. IOS was repurposed into e-commerce utilization in the early 2010s as final-mile delivery demand increased. It garnered more attention with the dramatic changes in pandemic-driven supply chains. Demand, and pricing, ratcheted up during the past two to three years in part because ocean containers were not being returned to China and needed to be stored in the U.S., according to Dean Brody, an executive managing director at the capital markets division of real estate services giant JLL Inc. (NYSE: JLL), which has been involved in multiple IOS deals.
Experts said that IOS developers face some of the same capacity challenges as traditional warehouse developers, namely a scarcity of open, urban land known as infill, zoning restrictions and neighborhood resistance to industrial development, and the potential for alternate land uses such as residential, office or retail.
There may be instances in which IOS and traditional warehouse developers compete for the same tracts. However, there isn’t a lot of current overlap because the land itself may not be suitable, either in terms of soil condition or actual space, for logistics real estate developers, Brody said.
It remains to be seen how much e-commerce growth moves the IOS needle. Brody said he doesn’t expect e-commerce to be an IOS market mover in the coming years, adding that current IOS supply-demand scales are in equilibrium. One of his associates, Marc Duval, a managing director at the JLL division, has a different view on overall demand for IOS, including e-commerce. IOS demand will be fueled by changing supply chain requirements, the growing need to serve end customers and additional infrastructure investments such as for electric vehicle charging, he said. Atkins of Zenith said that the outsized industrial rent growth spawned by e-commerce will draw more institutional investors to IOS projects.
Increased activity combined with relatively limited supply will create a “long-term growth trajectory for rents and values” in the IOS space, Duval said.
According to JLL data, in Newark, New Jersey, a key node for IOS facilities, prices peaked in the 2021-2022 period at $38,000 per acre, based on triple-lease rates in which tenants pay all taxes, insurance and repairs and maintenance during the lease term. Prices have since receded, on average, by 20%, it said.
The slowdown could be attributed to a mean reversion following the pandemic spike, as well as Amazon.com Inc.’s (NASDAQ: AMZN) decision to pull back on its total warehousing footprint. Amazon was an early catalyst of the present-day IOS market because of the tremendous growth in fulfillment demand and the need for open space to store thousands of delivery vehicles near its fulfillment and distribution centers.
Duval said that the subsector has yet to see peak prices and that it likely won’t until it becomes a “fully mature” class for institutional investors and rents get marked to market, in part because Amazon cut back on its overall warehousing needs.
Duval said that not everyone in the logistics warehousing institutional investor pool has shown interest in IOS. But that may change. “For the market to be as mature as the industrial warehouse market we would have to see an emergence of all core investors, as well as more transparency in the data and market indicators within IOS,” he said. “When we get the institutional and accepted investor in the asset class, [then] pricing will converge with traditional warehouses.”