Digging Into Self-Storage Due Diligence: What Are Facility Buyers Scrutinizing Today?

In a self-storage real estate transaction, the due-diligence period is the buyer’s opportunity to thoroughly examine various aspects of their target acquisition before finalizing the deal. The process involves reviewing several critical elements, each of which plays a role in assessing asset value, potential risks and profitability.

If you’re considering a self-storage facility purchase, following are some items to prioritize during due diligence, which typically lasts 30 to 45 days. I’ve also shared some of the trends that have emerged during recent industry real estate transactions.

Buyer Priorities

To begin, look at the self-storage property’s occupancy reports. These provide insight to the current tenant roster and rental rates being collected. The goal is to verify the accuracy of reported income and be aware of upcoming changes that could impact cash flow, such as potential move-outs.

You’ll also want a detailed inspection report to help you assess the overall condition of the building(s) and identify any necessary repairs or maintenance requirements as well as their associated costs. A thorough assessment of the premises should cover structural elements and mechanical systems. It should also give you a clear understanding of any necessary capital expenditures.

Here are a few other items to review:

The combination of the above items should allow you to make an informed investment decision. In many cases, this information is also required for a loan. The details provided help identify potential risks, estimate costs and evaluate profitability, which should enable you to negotiate effectively and confidently.

Due-Diligence Trends

Self-storage brokers work with many types of buyers. Not only are we able to glean insight from our clients’ mindsets, we can identify real estate trends. Following are five things my company has observed about the due-diligence process in this evolving market:

1. Greater overall scrutiny. Buyers have become more stringent in examining the fundamental performance of their target self-storage properties. There’s a higher threshold for return on capital, so the financials need to pencil out with higher certainty. This means occupancy reports are studied and rental rates matter more. In many cases, buyers have been asking for multiple snapshots during due diligence as well as updated numbers as the period ends and prior to closing.

2. More emphasis on supply and demand. Self-storage buyers have become extremely focused on the demand side of the equation, looking to see positive population trends within the subject area. This means more detailed market assessments and concerns over declines in rental rates. Buyers are also looking closely at demand, including recently developed self-storage inventory and potential or planned projects.

Ultimately, a market assessment is deemed favorable when demand is absorbing existing supply, and rates are stable and increasing as demand outpaces supply. It’s also desirable when there’s less planned supply and minimal threat of new facilities.

3. Dissecting older properties. Buyers are paying a lot more attention to deferred maintenance, which was something many were willing to overlook during the peak of the market. In assessing the potential for capital expenditures, many are asking sellers to address issues before closing or looking for a deal on the sale price.

4. Price contention. Though the issue of self-storage sale price is addressed prior to due diligence, there’s been a gap in seller and buyer expectations that’s made it difficult to close transactions. Buyers expect a perfect due-diligence review or concessions on price. The good news is sellers are beginning to come around, and the bid-ask spread is narrowing.

5. Appraisal challenges. This is a light trend but still worth noting. With capitalization rates rising and financials being closely scrutinized, property appraisals have become a source of pain on some deals. Some self-storage facilities may not appraise at a high enough value to support the sale price, which becomes a thorn in the seller’s side during due diligence.

These trends underscore how important it is for self-storage sellers to ensure their properties are well-positioned to meet buyer expectations. They also offer buyers insight to market conditions and how to make the most of their due-diligence period. By understanding and adapting to these trends, everyone can navigate the real estate process more effectively, allowing for smoother transactions and better outcomes for all parties.

Scott Schoettlin is managing director for SkyView Advisors, a Tampa, Florida-based real estate brokerage that specializes in self-storage. In representing sellers, Scott strives to help self-storage owners maximize their properties’ value. He has more than 20 years of experience advising high-net-worth individuals and consulting with many large and mid-sized companies to help them realize attractive returns on their investments. To reach him, call 813.829.1248 or email [email protected].