The stage has been set for some investors to capitalize on a once-in-a-lifetime opportunity while others feel the pain of having made poor investment decisions, falling victim to predictable errors such as “excessive optimism or overconfidence.”
Over the last several years we’ve seen the accelerated awareness and acceptance of an industry that, until recently, was referred to as the “stepchild” of real estate asset classes due to its lack of transparency and standardization. In recent years, investors, lenders, appraisers and consultants all made decisions to invest in self-storage believing their respective facilities could capture a disproportionate share of a market’s self-storage demand.
This frenzy of investment was augmented by several sources of low-cost capital made available to many borrowers with little or no self-storage experience. The dearth of information helped to create an “imperfect” marketplace where knowledgeable investors took advantage of less informed ones who came to this market with unrealistic yield expectations.
Act I: The Problem
It’s not the self-storage market that’s the problem for many of today’s investors; it’s the “deal” that some investors made. Many who acquired facilities within the past few years paid the highest prices in the history of the industry, and did so having given little or no consideration to the differentiation in risk between types of facilities and locations.
Soon, many of these investors will face loans that are coming due on facilities they overpaid for and over financed. Given the tighter underwriting standards of today’s capital markets, it means these investors will most likely be required to put additional equity (hard dollars) into the deal. Some will be forced to sell, creating more opportunity for others.
Act II: The Opportunities
Sports fans have a saying, “Let the game come to you.” That’s exactly what many astute self-storage investors have been doing ... waiting. Now, the market is coming to them and we will all see them stepping up to the plate.
Those who have been in real estate for a while may recall the origins of national hotel chains, such as the Hilton and Sheraton, began during the stock market crash and depression of the 1930s, when entrepreneurs took advantage of financially distressed hotels.
Experienced self-storage investors, who understand market fundamentals are strong and who have been waiting for the market to come to them now have an opportunity to expand their holdings by acquiring facilities from financially strapped investors.