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.
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.