Since the beginning of the current bull market and favorable economic conditions, the primary focus in the self-storage sector has been on developing new facilities. Builders have been moving at a frenetic pace to satisfy the pent-up demand brought on by the recession and a less-than-favorable lending environment. However, there are still great opportunities in the market for those seeking to buy underperforming facilities and create value through renovation and repositioning.
Some of the best industry openings are older properties that exhibit years of neglect and deferred maintenance. These facilities often require significant upgrading. Many lack modern security features, temperature-controlled units and other amenities commonly found at other sites. They may have a less-than-desirable unity mix, poor access or limited visibility. As a result, these properties suffer from lower rental rates than their competitors.
This may not sound particularly appealing to the masses, but there can be great rewards for savvy investors willing to put forth the effort to turn these ugly ducklings into beautiful, competitive swans. Many have made small fortunes by focusing on older, underperforming, class-C facilities and transforming them into solid, class-B contenders. It isn’t as tough as you might think. Though the leap from class B to class A is difficult, you'll find the jump from a C to a B isn’t nearly as daunting or capital- and labor-intensive.
Securing a Hidden Gem
So, how do you go about finding these diamonds in the rough? Uncovering these gems is no more difficult than finding a good piece of undeveloped land. In many cases, it’s quite a bit easier.
First, many underperforming facilities are listed with commercial real estate and self-storage brokers and viewable on their websites. You can purchase a comprehensive list of facilities for sale in a given market from a list broker. You can also begin the gathering process with a mailing campaign, or by visiting or cold-calling properties after searching online for potential facilities in your target markets.
Banks are ready and willing to make loans on self-storage acquisitions because the industry has generally enjoyed the lowest loan-default rate of all commercial real estate asset classes dating back to the 1970s. Due to strong sector performance, many investors are being welcomed with open arms when presenting a loan request and ultimately receiving very favorable rates and terms, along with additional rehab capital and deferred payments to boot!
So, don’t be shy about approaching community banks, credit unions and savings and loans in the same communities as your subject facilities. Lenders have increasingly moved away from making “speculative” loans on development projects in favor of income-producing assets with a historical track record of measurable performance. This has paved the way for investors armed with a solid business plan and thorough due diligence to receive funding for class-C facilities from local lenders.
When thinking of ways to upgrade a facility, remember that changes don't have to be major. The obvious place to start is curb appeal. How does the site look compared to newer properties in the area? Are the structures weathered? Have the roof, walls and doors have faded to single shade of grey or tan? A color change can do wonders for the appearance of an acquisition. Similarly, a new sign with color-coordinated flags, banners and other attention-grabbers will draw attention to the improvements you’ve made. Once you’re done with the cosmetic stuff, consider these other value-add options:
Site expansion. The item with the most potential to positively impact the appreciation and value of an underperforming facility is vacant land for expansion. Smart investors will immediately assess the highest and best use of any unused property or adjacent parcels that may be available for purchase. Either would allow you to add more storage units.
If there’s boat/RV parking on the site, consider using that land for additional buildings, since the return on investment from new units will generally outweigh the revenue from parking spaces. Contact neighbors to assess whether there may be an opportunity to purchase their land/buildings. This is probably the greatest way to increase the value of your facility while scratching your development itch.
Amenities. There are many conveniences that can be added to upgrade an existing self-storage facility. A small retail center is probably the simplest and most cost-effective way to improve the bottom line and provide value to customers. If feasible, consider offering truck-rental services or creating a business center with workstations for small-business tenants. Other amenities to consider are a pack-and-ship center, billboard rentals, vending machines, a propane cylinder exchange and records storage.
There are dozens of possibilities. Underperforming facilities vary by site and market, so some research is needed to determine the feasibility and worthiness of each possible addition. The increase in income and the return on investment may be surprisingly rewarding.
Technology. Adopt the latest technology to round out your renovations and repositioning. Security remains a top concern for customers, and technological advancements have made it affordable to install state-of-the-art surveillance systems at a fraction of what it used to cost. A self-serve kiosk may also be a smart addition, depending on the site and its demographics.
Marketing. Successful repositioning of your upgraded facility can’t occur without a detailed marketing plan. Capturing the attention of prospects is critical when competing against well-heeled, class-A competitors. Thankfully, marketing can be carried out very efficiently with today’s automated outreach and processes. Strongly consider a customer-relationship-management platform that integrates with a responsive website. Set daily, weekly and monthly goals, and regularly measure results to gauge success.
The laws that determine self-storage investing success are always changing, but the acquisition of underperforming facilities remains a strong, viable strategy. This will be especially true moving forward, once we head into the next economic downturn and new development slows to a crawl. The merits of this approach have proven to be extremely profitable.
Scott Meyers is the president and owner of Indianapolis-based Kingdom Storage Holdings LLC. He’s been involved in the self-storage industry as a developer, owner, syndicator and operator since 2005, owning and operating 23 facilities across seven states. His education platform, www.selfstorageinvesting.com, offers information, software and seminars to help individuals launch and grow a self-storage business. To reach him, e-mail firstname.lastname@example.org.