The combination of these three factors—interest rates, the recovery and lack of new construction—has caused a bonanza for the self-storage industry, or at least the larger participants that employ current marketing methodology and best practices. This is never more evident than in the share prices of the four public real estate investment trusts (REITs) in the self-storage sector.
However, the good times for the smaller one-off owners and those sites in the smaller secondary and tertiary markets, as well as the rural markets, have generally not participated in the recent industry turnaround. More often than not, their lack of participation in the market uptick has been due to a lack of best-practices management, which is not keeping current with the latest marketing requirements, especially those activities related to the Internet.
Competing for Acquisitions
What is Devon Self Storage doing with respect to the sale of any of its assets, and how are we competing for acquisitions with investors that are willing to pay 6 percent cap rates or lower? During the first six months of 2013, Devon sold two assets. Both sold at the very high end of what we had been anticipating after a rigorous bidding process in the open market, where our broker distributed the properties’ information to more 4,000 prospective buyers. We saw firsthand what’s occurring with stabilized properties in strong markets.
At the present time, we do not have anything else that’s likely to be on the market in the coming quarter, but that doesn’t mean we won’t receive an unsolicited offer for one of our assets at a price that would be difficult to refuse.
On the acquisition front, Devon has a very narrow target for acquisitions. We are proud to be classified as “bottom feeders” in that we’re looking to either acquire first mortgages at a significant discount to the face amount on a troubled asset from a troubled lender, or make an equity purchase where the price we can achieve is significantly below replacement cost and, again, we have a very troubled seller with a very unhappy mortgage holder.
We believe Devon’s superior property and asset-management team can turn around that troubled asset and generate a significant return to our financial partner. That return is typically greatly enhanced due to the very favorable acquisition price, as the real profit on a real estate investment is made at the purchase, not the sale.
Thus, while the public REITs and the huge institutional investors are chasing the few portfolios of class-A or -B properties at what Devon believes to be inflated prices, we will continue to try to find the proverbial “needle in a haystack” by acquiring significant value-added assets and managing them into a position where we can then sell those assets to those 5 percent cap buyers as we have done twice this year already.
Kenneth E. Nitzberg is chairman and CEO of Devon Self Storage, which owns or manages 32 facilities across the country. The company is based in Emeryville, Calif. For more information, call 800.995.4480; visit www.devonselfstorage.com .