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Eyeing the Canadian Self-Storage Market: Investor Advice for Buyers and Sellers

Eyeing the Canadian Self-Storage Market: Investor Advice for Buyers and Sellers
The self-storage industry is thriving in Canada, which means more investors are interested in the asset class. If you’re thinking about buying or selling a facility in this market, consider the following advice.

Self-storage has become an exciting and sought-after market class in Canada over the last two years. One reason behind the newfound interest was the announcement last year that Microsoft Corp. Co-Founder Bill Gates was investing in the industry. However, the truth is investors and institutions have been migrating their dollars into “hard assets” with good cash flow for some time.

Let’s examine some factors driving the Canadian self-storage market as well as advice for buyers and sellers.

Market Overview

Compared to other real estate asset classes, self-storage has performed exceptionally well during the pandemic, for several reasons.

First, it isn’t subject to the same challenges as multi-family or retail. Capitalization rates for multi-family properties have been compressed due to the consolidation of assets from large public and private real estate investment trusts in Canada. Additionally, multi-family landlords have been greatly limited in their ability to increase rates or evict tenants who fall behind, which has made it more difficult for “mom and pop” owners to efficiently manage their assets. Similarly, commercial retail assets have experienced volatility due to a limited capacity to provide services in a COVID-19 environment.

Another factor contributing to self-storage success is the “staycation” and outdoor-recreation trend, which is driving consumers to stick close to home and purchase recreational items such as camping equipment, bikes, motor homes, boats and sporting equipment. Of course, all of this increases the need for storage. In addition, some families are downsizing, whether for economic reasons such as employment uncertainty or common life transitions such as retirement.

As such, Canadian self-storage has experienced an uptick in occupied units in most markets. As the industry becomes more appealing, individuals looking to grow their portfolio have decided to invest.

Self-storage ownership is quite decentralized in Canada, with 70% of owners having a single asset/location, though there’s been more consolidation in recent months. Several groups have merged or amassed a portfolio of more than 1 million net rentable square feet. These firms account for a great deal of the remaining 30% of the market, though there are still several mid-size regional operators.

Traditionally, self-storage assets tend to sell quicker when they’re closer to primary/urban markets where there’s been extensive activity. However, we’ve seen a trend of transactions occurring in secondary and tertiary markets as competition for urban locations becomes more intense.

Advice for Buyers

Self-storage properties are often valued based on gross potential income, which means the buyer often pays more for the asset than the business itself is worth. But financial institutions will typically only lend on actual income, not gross potential, so the purchaser must place a larger down payment than expected.

Self-storage assets are in high demand in Canada right now, and facilities listed through a broker are “shopped” to the market. Often, once broker fees are factored into the purchase price, the buyer can end up paying above market value, even when the asset doesn’t have the income to support it. On the other hand, if they can deal directly with the seller, it’s often easier to facilitate a transaction that’s a win-win.

Before you buy, I recommend determining whether you have the time and expertise to actively manage a self-storage facility. If not, seek existing owners who have an investment vehicle to purchase and manage a portfolio on your behalf. In general, to maximize the value of a real estate asset, it takes an ongoing commitment and focus to learn the industry its trends. If you’re unable or unwilling to be an active investor, consider partnering with the best owner-operator you can find.

Advice for Sellers

If you’re among those owners looking to sell, you must grasp the realities of the market. Typically, real estate transactions stall for three reasons:

  • The owner doesn’t know the true value of their facility, and the buyer and the seller can’t agree on the “fair market value.”
  • The owner hasn’t discussed the fate of the business with the family and doesn’t know whether all members wish to divest of the property.
  • The owner hasn’t spoken with a tax accountant and attorney to ensure the business is structured to allow maximum value when selling.

Self-storage owners often struggle to determine fair market value for their asset. The potential gap between what the owner or broker feels the asset is worth and the business appraisal received to obtain financing can derail a transaction. Ideally, a seller would source a reliable company that offers valuation services to determine asset value. Often, they can do so with no obligation or commitment to list.

If you’re looking to sell in the next year or so, get professional advice early in the process. It doesn’t need to come at a cost. A professional broker should be willing to discuss your asset and the market without requiring a fee or a listing. When I speak with owners early in their decision to sell, I show them how to maximize the value of their asset. By providing knowledge about their competitors and what the market desires for amenities, I help them make wise decisions.

Here’s my best advice: You don’t necessarily build your self-storage business to sell it; however, you should operate it in such a way that it could be sold if necessary. For example, it’s important to invest in technology and have systems and processes in place that would allow a potential buyer to readily assume management of the property.

Whether you’re looking to buy or sell in Canada, partnering with an expert is essential to develop a roadmap for the future.

Lloyd McDonald joined The Storage Acquisition Group in 2021 as director of Canadian acquisitions. With an extensive background in real estate, he built a private financial-services firm that placed more than $1 billion investor capital into commercial, industrial and multi-family asset classes across North America. Most recently, he was instrumental in the consolidation of a national portfolio of Canadian self-storage assets in Canada. To reach him, email [email protected].

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