Catalyst Investment’s Dan Haroun and Max Heiden Have Big Plans for IOS – Commercial Observer
Most people wouldn’t give a passing glance to the thousands of industrial lots beside freeways and rail lines along urban outskirts, but Dan Haroun and Max Heiden saw in them an undervalued asset that would change their lives.
Six years ago, Haroun was working for New York-based private equity shop Meadow Partners when he stumbled upon a pattern of comparatively small transactions involving industrial properties that seemingly offered a high return on investment.
Haroun, 30, noticed that e-commerce mega-companies which had been snapping up warehouse space throughout the Northeast often needed much smaller lots to store their trucks and other equipment. That subcategory, known as industrial outdoor storage (IOS), was easy to disregard because deals were sometimes as low as $1 million and the sites often consisted of little more than a few acres of asphalt and a maintenance bay.
He called his close friend Max Heiden, whom he got to know when they both worked for SL Green Realty’s acquisitions team after they graduated from the University of Pennsylvania in 2016 — Haroun earned an engineering degree, Heiden studied economic history — and brainstormed how they could capitalize on the trend. They both decided to leave their jobs in early 2021 to launch their own investment management firm, Catalyst Investment Partners.
“It’s hard to go off on your own to buy a $100 million building in New York City, but we saw that this type of transaction was a good opportunity that bigger institutional groups wouldn’t want to spend their time on,” Haroun told Commercial Observer.
The work wasn’t very glamorous at first. A mutual friend found them a free office inside a law firm near Penn Station that was available because no one was coming to work. The 8-by-10-foot space was windowless and so small that Heiden and Haroun had to sit back to back. They set a goal of raising $40 million in their first round of financing and brought in $55 million, but their office was so barren it was suggested they add a plant.
“When we first started raising money, a pitch coach told us ‘Your background is really bad,’ so Dan walked up to the Flower District and said, ‘Just give us something,’ ” Heiden said.
Turning to his business partner, Heiden asked: “What was it you got?”
“It was a bird of paradise,” Haroun said. “I got a nice $100 bird of paradise, and it was the background for the hundreds of fundraising meetings we took.”
For the next six months their weekdays consisted of waking up at 5 a.m., getting into Heiden’s Mazda CX30 and scouting hundreds of industrial lots up and down the East Coast while simultaneously creating a spreadsheet of potential properties, tasks that typically took 17 hours. Then they reached out to property owners to suss out whether they would sell.
“It’s often someone who runs their own equipment company and they’re approaching retirement, their kids don’t want to take over, or the business itself is too small to be sold to a competitor,” Haroun, 30, said. “The only big asset that they have is the real estate itself, and selling the real estate is their retirement package that allows them to wind up their business.”
The process was extremely time-consuming.
“You have to go to the deals, the deals don’t come to you,” Heiden, 30, said. “We were cold-calling people, getting screamed at and getting told to go away. After about 1,000 calls we got one.”
The “one” was the willing owner of a 3-acre property in Pennsauken, N.J., just across the Delaware River from Philadelphia and close to two interstates. Catalyst acquired the lot in 2021 for $2.5 million, redid the surface and fencing, and leased it the following year to a business that stores modular trailers. Gradually they had 20 properties in their portfolio and had begun building out a staff.
“It’s a better risk-adjusted return than what you can get in other forms of commercial real estate available to fund investors,” Heiden said. “You have this great supply and demand dynamic, and the deals are very small and not as competitive as the typical $100 million marketed warehouse portfolio. That’s what makes it differentiated.”
These days, the market for investing in IOS has gotten increasingly crowded.
Institutional investment firms have plunged into making multiple IOS deals. Last fall, Alterra IOS sold a 51-property portfolio for $490 million to Peakstone Realty Trust that it had purchased with J.P. Morgan Asset Management, and this month J.P. Morgan launched a $700 million joint venture with Zenith IOS to purchase industrial outdoor storage properties across the country.
Private equity managers have been looking to start their own ventures in the field as well. Justin Horowitz, a broker at the family-owned capital markets advisory firm Cooper Horowitz, has been fielding calls from friends who have wanted to start companies specializing in IOS.
“These deals weren’t really being looked at at the beginning of COVID, whereas there’s a huge aggregation play today,” Horowitz told Commercial Observer in December.
And why wouldn’t they want to invest? Demand for industrial space in the Northeast had steadily risen over the last decade thanks to the growth of e-commerce giants like Amazon, Walmart and Ikea that needed to build their warehouses near major urban centers. The market remained stable even during the pandemic when online mega-retailers acquired whatever industrial properties were on the market to plop their fulfillment centers and last-mile depots for an insatiable public.
But the industrial market remains tricky to gauge as the nation has recovered from COVID. Demand in the New York area rebounded in the first quarter of 2024 when leasing volume rose 63 percent compared with the last quarter of 2023. But many properties have remained on the market as demand for warehouse space cooled in the latter part of last year, according to Colliers (CIGI)’ market reports.
Richard Warshauer, a Colliers vice president who specializes in analyzing industrial properties, said many developers are simply “land banking” these industrial storage lots with an intent to develop there in the future.
“There’s no question that as a future trend it’s important, but in the meantime I see flyers for these lots over and over, and I don’t see a lot of them taken off the market,” Warshauer said. “This is all the tail and Amazon is the dog, and the logistics needs of these IOS lots are really a function of the general market for e-commerce. You have diminished demand because Amazon and other big users have slowed down.”
In the meantime, Catalyst sought to get a leg up by focusing on smaller industrial properties in densely populated areas along the East Coast and developing vertically integrated expertise in the sector.
“If you’re not discerning about what locations you pick for this sector and you pick a market where there is readily available land, a lack of zoning and lots of supply creation, you’ll face more rent growth headwinds,” Heiden said. “There’s plenty of markets in Midwestern locations, where maybe they have no zoning laws at all, and you look at the data and see the supply of IOS can go up 20 to 30 percent over the next 10 to 20 years.”
The deals have kept coming, too. After raising $187 million in a second round of funding last spring, they acquired 27 seed properties and closed on $260 million in financing from two North American banks in December. (Horowitz served as an adviser to the deal.)
Today their team of 25 people monitors about 9,000 sites in their database. Their office on Third Avenue now has plenty of windows, too.
“Because this sector is so specialized, the information is opaque, and it is very hard to know what these properties should sell and lease for,” Haroun said. “We’ve aggregated all this data and built proprietary technology so we can make educated investment decisions. We can very easily identify the markets our tenants need to be in so we can do smaller transactions as efficiently as possible.”
