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Hidden Gems: Mining the Self-Storage Market for Underperforming Facilities

Hidden Gems: Mining the Self-Storage Market for Underperforming Facilities
Every smart self-storage investor looks for a competitive edge that’ll result in the highest return. An underperforming facility can certainly provide one, though it can be difficult to make an accurate assessment. Read why some properties flounder, why they can be a smart buy and how to maximize their potential.

Investing in underperforming self-storage properties can be complicated. When analyzing one of these assets as a potential purchase, you first need to understand why it’s floundering. It might be for many reasons, and not all of them can be remedied. Still, it’s worthwhile to investigate, as the right facility can yield tremendous upside. Let’s look at what constitutes “underperformance,” why this type of acquisition can be advantageous, and ways to improve a property to create strong return on investment (ROI).

Underperformance Factors

So, why do some self-storage properties underperform and what exactly do we mean by that? It relates to net operating income (NOI), which is the revenue generated by a business minus its operating expenses. NOI will suffer when a facility has low revenue, high costs or both. These conditions can be the result of poor management, bad location, high competition and other factors. Here are some common reasons a site may be struggling:

  • The market is oversupplied.
  • The facility is difficult for customers to reach.
  • The operator isn’t investing in proper marketing.
  • Curb appeal is poor.
  • Security is weak, leading to crime and a negative business reputation.
  • Site management has allowed rental rates to stagnate or has used too many discounts.
  • There are too many staff, they work too many hours or they’re overpaid.
  • The property taxes are too high.
  • The operator pays too much for services to support the site.

Fortunately, many of these problems have readily available solutions, though some may be complex or expensive. For example, it isn’t always easy or possible to lower your property taxes, and marketing can be pricey. If you believe eliminating staff is necessary, you may have to weigh the cost and benefits of investing in technology to compensate, such as online rentals or a self-serve kiosk. Sometimes, there’s no solution at all, as in the case of a bad location or market saturation.

Why Invest in Underperformance?

The reason investors consider purchasing an underperforming self-storage facility is there’s often a higher return potential when compared to stabilized properties. If the reasons for the site’s stagnation can be identified and remedied, the upside should create additional ROI for the new owner.

For example, let’s say a property is failing due to poor security and bad curb appeal. At first, this might look like a disastrous investment; however, depending on its location and local supply, upgrades that address these deficiencies can help make the asset much more competitive. Conversely, a visually stunning property may underperform for other reasons, which is why you should never judge a book by its cover. Understanding why a property is doing poorly will help you know whether to buy or avoid it.

This is critical because curing underperformance carries additional investment risk. During underwriting, it’s important to ensure the price of the property justifies the gamble of executing an improvement plan. This risk/reward analysis will be different for every investor depending on facts and circumstances. In the current environment, self-storage investors aren’t shy about paying for future NOI—meaning a facility’s potential for income growth can be rolled into the purchase price. This is one reason an underperforming property can become quite expensive relative to the risk of achieving desired performance.

Fixing Deficiencies

When analyzing an underperforming self-storage facility, whether it’s a potential acquisition or a property you already own, first look at trends in revenue and expenses. Next, review the physical and economic occupancy. This data combined with a thorough site inspection will provide a good starting point for identifying areas that need to be remedied. Then you can create a plan for implementation.

For example, if occupancy rates are decreasing, look at the rental rates being charged by competing self-storage properties in the trade area. If the rates are low, consider a revenue-management plan to raise rent and close the economic gap. If the rates are on par, look at property condition and site amenities including security features, self-serve technology, onsite staff, deferred maintenance, etc. Depending on your findings, you might improve the curb appeal, fix the roof, add more security or increase your marketing efforts.

How to Find Properties

So, where should you look for underperforming self-storage facilities to acquire? The answer inevitably varies, though these properties are typically owned by so-called “mom and pop” or independent operators.

Once you’ve identified a desirable market, search for opportunities by developing rapport with local brokers. This provides immediate deal flow. Alternatively, you can scour the target trade area yourself, making visual observations and secret shopping different sites. This can often provide initial insight into whether there’s room for improvement to a facility’s appearance or management. Once you’ve found a promising candidate, attempt to contact the owner, then ask if they’re willing to sell and, if so, at what price.

As long as deficiencies can be identified and remedied, underperforming self-storage properties can present excellent investment opportunities with lots of upside. As you move toward potential acquisitions, proceed with caution to ensure the risk is worth the return you can expect to achieve.

Paul Broaddus is a partner and chief investment officer with Riverbend Development Co., which owns and operates multiple assets across different real estate classes including self-storage. Launched in 2018, My Garage Self Storage has more than $70 million invested throughout Texas. To reach Paul, call 915.241.6809; email [email protected].

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