Acquiring a self-storage facility can be difficult, especially in markets with lots of new supply and even more facilities in the pipeline. There’s extreme competition from other investors seeking the same opportunities, particularly considering that so few available properties make economic sense.
Yet even under these conditions, good buys do exist—if you know how to identify them. Let’s examine what you need to get a leg up on your competitors and successfully purchase a profitable self-storage property.
A “good” self-storage location has always been defined as frontage property with exposure on a busy street in a neighborhood with a of uses (residential, multi-family, office and retail). Under current conditions, it would also have high barriers to entry to minimize the risk of new competition. To help home in on a potential buy, consider the following:
- Do you want to be in a major market, or are you open to owning in a secondary or even smaller area?
- Will you manage the facility yourself, or will you hire a management company to operate it for you?
- How often will you visit the site?
Going through this thought process helps determine if you should own a property nearby or widen the scope of your search to include opportunities within a one- or two-hour flight.
Once you settle on an area, you must learn the local market and which self-storage properties have recently sold, including sale prices and dates. You should understand their physical and operational characteristics, along with how those features related to their net operating income, capitalization (cap) rate and pricing.
Because it’s critical to understand the market value of any facility presented to you, visit municipal planning and development-services departments and investigate how much new supply is in the local pipeline. By knowing a specific market, you can quickly determine if a self-storage property is reasonably priced and worth pursuing. You should also know any property candidate’s age, size and amenities. Look for the following:
- Frontage on a street with significant traffic
- Not too many existing or planned self-storage facilities
- Positive trends in rent and occupancy rates, both with the subject property as well as its nearest competitors
Stable or Upside?
Once you have a target market, it’s time to decide which kind of investment you want to pursue—a stabilized facility or one with upside. In any given area, prices and cap rates for stabilized properties should be consistent. This means cap rates, sales prices and values will fall within a narrow range when a property is evaluated by several well-informed buyers. This isn’t the case with upside properties. Instead, prices and cap rates can vary widely and are much harder to establish. This is because upside is often subjective, based on a buyer’s perceptions, beliefs and assumptions.
Stabilized properties generally offer higher returns with lower risk. They provide an opportunity to modestly increasing rent and revenue over time. In contrast, upside properties usually offer lower returns—sometimes much lower or even negative. However, they can also provide the opportunity to significantly increase returns by implementing operational and physical improvements.
There are common indicators that may signal a property has upside potential. Though these aren’t necessarily proof-positive, they’re signs that further investigation may be warranted to better understand the situation:
- A property with higher vacancy than nearby competitors, especially if its rental rates are equal to or lower than those businesses
- A property with inexplicably high operating expenses
- A property that comes with excess land for expansion or a large number of open parking spaces on which additional buildings could be added
Upside properties are in the highest demand by entrepreneurial buyers. Unfortunately, stabilized facilities are often mistaken for those with upside, which can cause buyers to substantially overpay. This is why it’s critical to understand the market dynamics, including number of existing and planned facilities, occupancy rates, rental rates, expense ratios, and major players. Learn specific neighborhoods or submarkets, particularly population numbers, growth projections and other demographic information and trends.
This is a lot of information to gather, so it’s often best to shortcut the process by working with a real estate broker with a self-storage specialization. He’ll already have much of this data and should be willing to share it with you. He’ll also know what properties are for sale or coming soon.
It’s important to remember that other investors create competition for properties in the best markets. Therefore, once you’ve met with a broker, stay in close communication. Ask what you can do to move yourself to the top of the list of qualified buyers. Make sure he knows your price range and the characteristics of your “ideal” property. Most important, be sure he knows you understand the local market values and are prepared to be competitive and act quickly when it’s time to write an offer.
To be a competitive buyer, be prepared to offer a fair price and make the largest possible earnest-money deposit with the shortest possible due-diligence period. You can only do this safely if you’ve already conducted your research and understand the market. By this time, you should already have contacted several self-storage lenders to gauge what loan programs are available to ensure your financing contingency is realistic.
Available properties often have existing loans that must be assumed. In these situations, you should know what’s involved to qualify. Sometimes loan assumptions can be more difficult and time-consuming than originations.
Taking the time to understand location, research viable investments and use local expertise will lower the stress of making a self-storage acquisition and position you with an opportunity to realize excellent returns.
Bill Alter is a self-storage specialist with Rein & Grossoehme Commercial Real Estate in Arizona. Specializing in storage since 1986, he’s been involved in the sale of more than 165 storage facilities totaling more than 10 million square feet and a value of more than $450 million. He can be reached at 602.315.0771; email@example.com.