In this structure, the REITs bring some of the equity to the transaction, with the joint-venture partner bringing the balance. Structures vary widely, as do the motivations. Generally, it enables REITs to leverage their equity into a greater volume of transactions and dilute risk. They also bring their brand and operating platform to the entire transaction, which gives them more scale and spreads general and administrative costs across a wider portfolio.
Joint ventures don’t only benefit the REITs. In fact, local, regional and even national privately held companies have more opportunities than ever to enter joint ventures. There are tens of millions of dollars of equity looking for a home in the self-storage space. A lot of equity firms representing this money are not yet invested in the product type, so they tend to be very open minded with regard to opportunities.
Joint ventures are a great way to leverage equity. Just like the public companies, the operating partner benefits from branding, operational-expense scale and market share as if it owned the entire property; and it accomplishes this with less than 100 percent of the equity.
Because transaction opportunities tend to be limited, with volume not coming anywhere close to matching demand, most joint-venture equity partners look to place as much as 95 percent of the equity in acquisitions and as much as 85 percent in development deals. In core urban markets, whether it’s an acquisition or a development, some look to provide as much as 97 percent of the equity.
Of course, there are issues regarding control, decision-making, property management and other issues that some privately held companies want to avoid. But generally, when interests are properly aligned, joint ventures enable operators constrained by limited equity to grow at speeds much faster than they can grow organically. As the joint-venture equity partner gains comfort and confidence in its operating partner, broadening the geographic focus of a partnership can further widen the scope of opportunity.
The Long-Term Outlook
As the investment world continues to navigate this low-yield environment and the supply-and-demand fundamentals get closer to functioning without a Fed bond-buying program, the risk-to-return expectations for all the capital in the system will adjust. Allocations away from perceived riskier assets will shift back to perceived safer assets, which could impact commercial real estate at some level. However, as long as the adjustment is measured and not instantaneous, it’s likely accompanied by stronger inflation, which will benefit asset classes like real estate.
Self-storage is poised to continue to outperform, as it’s not bound by rental rates tied to long-term lease obligations. Only hotels can put on inflation to its bottom line faster, as it prices its product daily rather than monthly. A very comfortable, long-term outlook and strong expectation for the self-storage industry is excess capital will continue to provide multiple structures that promote growth and flexibility to pursue opportunities.
Aaron A. Swerdlin is an executive managing director in the Houston office of NGKF Capital Markets, a group within commercial real estate advisory firm Newmark Grubb Knight Frank. Best known for his self-storage property expertise, Mr. Swerdlin has 20 years of experience in capital markets and serves as NGKF’s national practice leader for the self-storage sector. To date, he’s led in excess of $4.3 billion in self-storage transactions and more than $4.8 billion in overall transaction volume. To reach him, call 713.599.5122; e-mail firstname.lastname@example.org ; visit www.ngkf.com/storage .