Alterra IOS CEO talks about the superior real estate sector hiding in plain sight

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The rapid construction of artificial intelligence and quantum infrastructure is creating a boom in the often overlooked commercial real estate sector. Industrial outdoor storage (IOS) is suddenly seeing significant growth in demand and rents amid weak supply.

The IOS consists of all types of paved or gravel lots where businesses can park construction equipment, vehicles, containers, supplies, and anything that can be stored outside. It serves as essential back-office support for the movement of goods across the country – everything that is not a warehouse or factory. It can contain a structure, but the designation requires that the structure be less than 25% of the total area.

These sites are often located near highways, ports and other major infrastructure, but are now becoming essential starting points for building data centers. Developers are idling millions of dollars’ worth of generators, tractors and other critical equipment, according to Alterra IOS, a prominent player in the space that has acquired more than 400 sites nationwide.

“It’s real estate hiding in plain sight,” said Leo Addimando, CEO of Alterra IOS. “There’s over a trillion dollars of IOS real estate in the United States, but most of it is owned by municipalities and the government. It’s the shipyard, it’s the airport. There’s about $300 billion of it, mostly owned by small local owners who own companies, not institutions, and that’s the market to address.”

This sector was once considered a small-business-dominated corner of the commercial real estate market, but is now attracting significant investment from big names. In August, Zenith IOS formed a $700 million joint venture with institutional investors, guided by JP Morgan Asset Management, for IOS properties across the country. The total asset value will be more than $1.5 billion, making it one of the largest IOS wallets in the United States, according to a Zenith release.

Also this year, Blackstone made a $189 million loan commitment to Alterra IOS for 49 sites and a $231 million loan commitment to Jadian Capital for a portfolio of 43 properties.

The fundamentals are attractive and becoming more attractive, outperforming the bulk warehouse sector. While warehouses may have garnered investor attention in the past five years, due to the growth of e-commerce, IOS has had double the rental growth and has nearly half the vacancy rate of the bulk warehouse sector, according to a report by Newmark.

IOS rents are up 123% since 2020. Phoenix, Memphis and Atlanta lead in rent growth. In some markets, IOS offers rents similar to bulk warehouses when settled per acre.

“It’s bigger than self-storage. It’s bigger than manufactured housing. It’s bigger than marinas. It’s bigger than RV parks. It’s bigger than a lot of the property classes that are already owned by institutions,” Addimando said.

Alterra just announced the closing of a $150 million loan facility from funds managed by Blue Owl Capital. Initial financing for the facility was secured by 21 properties in 12 states. The follow-on financings of the loan commitments will support the acquisitions of Alterra IOS Venture III, a closed-end fund with $925 million of equity commitments, according to Alterra. This deal is Blue Owl’s first financing in the IOS space.

“Our investment in Alterra reflects Blue Owl’s focus on working with market-leading operators in high-growth, resilient sectors,” said Jesse Hom, chief investment officer of Blue Owl’s real assets platform. “We see strong and sustained demand for IOS assets and believe Alterra is well-positioned to lead in this evolving space.”

IOS spans an estimated 1.4 million acres in the United States, but well-located sites remain rare due to zoning, according to Newmark, which points to users like FedEx, J.B. Hunt and Maersk in the transportation and logistics space. For equipment and bulk materials storage, users will include TruGreen, ABC Supply and United Rentals, which has approximately 1,400 locations across the United States.

Fundamentals are strong and improving, but the sector is not without risks. The demand for data centers is huge, but some are already warning that it is overheating. Still-high interest rates, tariffs, and a weak economy are also a concern, and then there are more fundamental issues, such as zoning.

“The No. 1 biggest risk is zoning, which is because there is limited land. Not only are they not creating more zoning properties, no one is giving zoning variances to zoning properties,” said Addimando, explaining that if anything, municipalities are trying to reduce the amount of zoning land because it does not create jobs or higher taxes.