Guidelines for Buying an Existing Self-Storage Facility: Aligning Your Investment Objectives With Market Opportunities
Copyright 2014 by Virgo Publishing.
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Posted on: 11/25/2010



 

By John Barry

It’s an excellent time to consider acquiring an existing self-storage facility. With commercial real estate values at their lowest levels in years following the financial crisis of 2008, as well as the subsequent recession and unknown recovery period, self-storage investment opportunities are certainly worth pursuing. Here’s a short summary of what you should look for when buying an existing facility today.

Find Motivated Sellers

Never before have self-storage owners been under such pressure to save their equity. Drops in occupancy rates have lowered valuations and, in many cases, to below the facility’s loan value. In extreme cases, valuations are even below the replacement cost.

Not only can facilities be valued on a capitalization rate based on current income but also on a dollar-per-square-foot or “dollars per pound” basis. Owners in default or foreclosure have created significant opportunities in what are called “distressed” situations.

Make a Management Decision

When considering purchasing an existing facility, decide early on whether you’ll engage a professional management firm to run the daily operation or handle this yourself.

Hiring a third-party company provides you with greater flexibility and gives you significantly more investment opportunities because the geographic location of a property isn’t as important when you outsource the management. Evaluating properties in many regions can increase your chance of obtaining the highest return on investment. Once a property is acquired, you can continue your daily occupation or enjoy the benefits of extended time away, since the management company will handle all aspects of the operation, including monthly reporting to you.

If you self-manage and enjoy the additional income, remember that for most facilities over 30,000 square feet, a management-company fee will be added as an operating expense when you sell, because most buyers will use a third-party management firm.

Seek Synergies

Will the new acquisition create synergy with the self-storage properties you already own? If all are in the same general market, chances are you can combine your Yellow Pages advertising. Is it possible your facility manager could operate all properties? Will your management company offer a lower fee if it manages them all?

When you put your offer in, price the facility as a standalone operation, and then enjoy the synergies once you close. These are savings you earned and deserve, since you worked hard to establish the other sites.

Look for Stabilized Properties

Self-storage has seen tremendous growth since its beginning more than 40 years ago. Development had been strong until about three years ago. Now we’re seeing a new-development freeze due to overbuilding and a lack of financing. Oversupply in many markets, along with the recession and higher unemployment, brought with it a nationwide decrease in occupancy and rental rates.

Buyers previously priced deals on the last 12 months of net operating income, but today buyers want to see 24 or 36 months of financial statements so they can see the weaker market trends. Look for stabilization in occupancy rates. Has the facility weathered the storm and appear to be improving? If the owner needs to sell, be conservative in your projections if occupancy hasn’t bottomed.

Scope Out the Competition

How does the facility compare in its location relative to the competition? Location has always been the No. 1 reason for success in real estate, and self-storage is a business that needs drive-by visibility to create an edge. Are traffic counts sufficient? It’s not unusual for potential renters to miss the name of a facility, but if they know where it is when they need storage, they’ll find their way to it.

How does the facility’s rental rates compare with competitors? If they’re lower, you have the potential of future rental increases. If they’re higher, price the facility where you think you’ll really be able to rent units. Find out what promotional discounts the competition offers and include these in your forecast. If they’re common to the market today, count on them in the future.

Does the facility have an edge in features and amenities? Does it have climate-controlled units while others in the market do not? Does it have fencing, security cameras or door alarms? Can you add truck rentals to better serve customers and create an additional revenue source? Ask yourself: If I was a self-storage tenant, why would I use this facility over the competition?  

Determine Your Goals

Is your goal to create a steady income source, do a tax-free exchange, pay down debt, expand the facility, or buy a distressed facility with low occupancy? Everyone has different aims, and many properties are available to meet them. If you buy a property that’s 90 percent occupied, what’s your up side besides current income and creating equity by paying down debt? What if another facility is built nearby? How will that affect your occupancy rate?

Some facilities today can be acquired below replacement cost and at low occupancy. If you buy a facility for less than the cost to build it and increase occupancy only 10 percent, you can really hit a home run.

Buyers are seeking expansion opportunities for two reasons: The land or building area for expansion usually comes at no cost and, if things improve, expansion means greater up side in potential revenue. Lenders are so conservative that they will loan on existing cash flow but not on extra land. Assuming you can achieve higher occupancy over time, when you can expand, the cost is minimal and the up side is high.

Self-storage still maintains the lowest default rates of all commercial and industrial segments. That doesn’t mean lenders have no defaulted self-storage properties in their portfolios. It means they require lower than historical loan-to-value ratios, down from 80 percent to 65 percent, generically speaking.

If you’re a first-time self-storage owner, it could be lower still. Lenders are seeking greater equity in projects to minimize their risk. At the end of the day, it lowers your risk as well―although the cost to get into the business has gone up. Cash is king, and with it you can find yourself in the driver’s seat.

In summary, look for motivated sellers, analyze the property’s trends, know the competition as well as the property, and be firm in your investment objective. As John Paul Getty once said, "There are always opportunities through which businessmen can profit handsomely if they will only recognize and seize them."

John E. Barry is vice president of brokerage for Investment Real Estate LLC, a York, Pa., firm offering full-service brokerage, management, construction and feasibility services in the mid- Atlantic and Northeast States. To reach him, call 717.779.0804; e-mail jbarry@irellc.com ; visit www.irellc.com .