Peakstone Realty Trust has shelled out $490 million for an industrial outdoor storage portfolio across the United States, marking the firm's entry into the high-growth property type.
The portfolio spans 14 states and includes 45 operating assets and six sites where redevelopments are planned.
Peakstone, an office and industrial real estate investment trust based in El Segundo, California, joins a growing cohort of investors that have been building up their national portfolios in the niche segment, typically involving sites with a small structure and expansive surface parking used by industrial tenants to store vehicles, machinery and other materials.
Such properties have been in high demand in recent years because of a relative lack of new supply.
“It’s like beachfront property in California. They’re not making any more of it,” Peakstone CEO Michael Escalante said during a call on Tuesday with investors, citing the firm's bet that tenants like Amazon, FedEx and others will keep leasing these hard-to-develop properties to store their vehicles, containers, supplies and other materials.
The seller was a joint venture involving Alterra IOS, a firm that's played an active role in attracting institutional investors to the industrial outdoor storage segment since 2016 through a series of funds. Alterra estimates the industrial outdoor storage market is worth some $200 billion.
From office to industrial
The off-market deal “advances the institutionalization of the IOS asset class,” said Leo Addimando, CEO and managing partner at Alterra IOS, in a statement.
J.P. Morgan Asset Management advised the selling venture that also included institutional investors. Peakstone took on $285 million in debt to finance the deal.
Properties within the 440-acre portfolio are 100% leased to tenants such as e-commerce giant Amazon, transportation and logistics firm Penske, equipment rental specialist Sunstate Equipment and building materials provider Mid-Atlantic Roofing Supply.
This portfolio is “far superior in many ways than the other portfolios we expect to see trade in the coming weeks,” Peakstone's Escalante said.
Peakstone has been tracking the industrial outdoor storage market since the beginning of the year, executives note, as the firm looks to pivot away from office into a more industrial-focused firm.
The company’s average base rent is currently 40% industrial and 60% office, with 19 industrial properties and 33 office properties across 19 states.
Fragmented segment
This deal increases Peakstone’s industrial concentration in Sunbelt and coastal markets including Atlanta, Dallas, Florida, New Jersey and Philadelphia.
Peakstone expects to increase rents in the portfolio by as much as 70% in the near-term by bringing them to current market rate. Existing properties are easily upgraded by adding small industrial buildings, Escalante said.
The deal comes at a time when U.S. office vacancies are at a record 14%, according to CoStar data, and industrial vacancies are hovering below 7%.
Industrial outdoor storage's highly fragmented ownership and barriers to entry have kept supply and vacancy rates low, and prices high, according to some investors, including Peakstone.
Alterra closed its third outdoor storage fund in May with $925 million raised. Manulife Investment Management and Foundry Commercial formed a joint venture to acquire and develop industrial outdoor storage areas in the Southeast in July, CoStar News reported. Other institutional investors that also targeted the niche segment include TPG Angelo Gordon and Fortress Investment Group, according to CoStar.
For the record
BofA Securities served as Peakstone’s financial adviser in the deal, while O'Melveny & Myers LLP, Latham & Watkins LLP and DLA Piper served as legal counsel.