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The ‘Turn It Around’ Investment Strategy: Finding and Refurbishing Underperforming Self-Storage PropertiesThe ‘Turn It Around’ Investment Strategy: Finding and Refurbishing Underperforming Self-Storage Properties
As the availability of fully stabilized self-storage facilities declines, many investors are turning to underperforming properties that offer value-add potential. While these investments come with challenges, they can be transformed into successful ventures. Here’s how to identify opportunities and the steps to maximize their performance and profitability.
6 Min Read
The self-storage industry has grown significantly, attracting investors who desire stable, recession-resistant assets. But with limited facilities for sale, particularly in top-tier markets, many shoppers have been forced to look beyond fully stabilized properties to those that are underperforming. Though these facilities may seem risky and can present challenges, they also offer significant value-add potential under the right conditions.
Self-storage has proven to be resilient across economic cycles, making it a favorite among institutional and individual investors, and lenders now recognize value-add opportunities as viable. Plus, there are many resources available to help new owners improve operations and performance. However, increased competition makes it critical to be selective. The factors behind poor performance must be carefully analyzed to determine whether they can be effectively remedied.
Let’s look at why self-storage fixer-uppers can be lucrative investments, how to identify them, and the steps to turn them into well-performing assets.
Common Causes of Underperformance
Before purchasing a value-add self-storage property, it’s crucial to understand why it’s underperforming in the first place. Common reasons include:
Undesirable location. Visibility and accessibility are crucial for any self-storage facility. Buildings that are difficult to find or access may struggle to attract tenants, especially if competitors are more conveniently located.
Saturated market or declining community. An oversupply of self-storage units in a stagnant or shrinking market can negatively impact rental demand. Properties in declining areas where there’s little economic growth may lack turnaround potential.
Deferred maintenance and poor curb appeal. Neglect and minimal upkeep can deter potential self-storage customers. Deferred maintenance may lead to further damage, costly repairs and safety concerns, ultimately attracting less desirable clientele and increasing the risk of crime in the area.
Lack of automation. In today’s fast-paced, tech-driven world, customers expect convenience. The lack of modern software, payment options, access controls or seamless online rental processes may redirect business to more efficient self-storage competitors. Automation is no longer a luxury but a necessity for a competitive operation.
Operational deficiencies. Poor management practices can stifle growth, for example, stagnant street rates and inconsistent rent increases. Similarly, poorly managed or excessive expenses can erode profits, leaving a self-storage facility struggling to stay afloat.
Finding the Right Self-Storage Property
Not all underperforming self-storage facilities are worth the investment. To find a suitable opportunity, you must first identify your requirements and parameters. Determine your available capital for a down payment and any geographical limitations based on your management platform. It’s essential to work closely with a knowledgeable broker who understands the nuances of the market and can help identify listings that meet your criteria.
If a self-storage facility is failing to meet its revenue goals due to an undesirable location or a saturated market, it generally isn’t a viable investment. Unlike operational or physical deficiencies, location is a fixed attribute, and you can’t relocate the facility or control market competition. Therefore, careful analysis is crucial to avoid investing where there’s limited growth potential.
When searching for the right opportunity, patience is key. Commercial real estate requires a long-term approach, particularly in the self-storage sector. The process of underwriting, analyzing and negotiating can be time-consuming, but a thorough evaluation is critical to ensure financial success.
The Steps to Self-Storage Recovery
Once you’ve identified a self-storage asset with upside potential, the process of turning it around requires careful planning, time and financial investment. Begin by assessing the scope of any deferred maintenance and create a detailed construction budget. Prioritize urgent repairs such as structural issues or safety hazards, and plan for additional improvements as cash flow improves. Work with local professionals for general repairs and seek out self-storage contractors for specific projects.
Next, invest in technology. In today’s market, it’s critical for success. Use management software that integrates seamlessly with your self-storage website and access-control systems. Your website should allow customers to rent units, sign leases, make payments and gain immediate access to the facility without staff assistance. Additionally, implement features like keyless entry or digital locks to enhance security and the customer experience.
If you’re hesitant, take small steps. Add online payments or automated gate access. Depending on your customer base, you can gradually scale your investment in technology to meet their expectations.
Operational inefficiencies can often be corrected at minimal cost and with significant impact. Evaluate the facility’s street rates and adjust them based on market demand and occupancy. Implement regular increases for existing self-storage tenants, but make sure they’re gradual to avoid losing customers. Closely monitor expenses and negotiate better rates with vendors for services like insurance, marketing and credit card processing.
Finally, consistently collect ancillary revenue from streams including tenant insurance, retail sales, and administrative and late fees. Every line item on your profit-and-loss statement matters when turning around a struggling self-storage property, so focus on tightening expenses while maximizing income.
When considering a value-add self-storage acquisition, factor in the cost of all necessary improvements in addition to its initial purchase price. To forecast the potential return on investment, you must create a detailed pro forma that outlines the expected timeline for renovations, rent increases and operational efficiencies. It’s also prudent to include a contingency fund for unexpected expenses or delays in the turnaround process.
Risk and Reward
While buying a financially lagging self-storage property may come with risks, it can also offer tremendous value-add potential for investors who are willing to put in the effort. By carefully evaluating the reasons for an asset’s shortcomings, implementing strategic improvements and maintaining efficient operation, you can turn these properties into successful investments. When managed effectively, self-storage continues to outperform many other asset classes, and the right turnaround target could become a lucrative addition to your portfolio.
Commercial real estate investing is a long-term commitment, particularly in the self-storage industry. You must be patient and remain diligent. You must also understand the local market and national economic trends. Transforming a property from underperforming to profitable can take time, and setbacks may arise along the way. But with the proper approach and resources, the right property can be a highly rewarding investment opportunity.
Jane H. Sauls is a real estate broker and co-owner of Sauls Storage Group LLC, a Carrollton, Georgia-based brokerage and consulting firm specializing in self-storage and other commercial real estate. She’s experienced in self-storage construction and project management, site selection, feasibility studies, exit strategies, and pro formas. She’s a graduate of the University of West Georgia and holds a Certified Commercial Investment Member designation. To reach her, email [email protected].
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