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Are Off-Market Deals a Smart Self-Storage Investment Strategy?

Economic uncertainty creates challenges for self-storage investors, so it makes sense to pursue vehicles that offer an increased level of control. One such option is the off-market deal. Read what it is and why it may be a smart investment strategy in this climate.

Steven Wear

February 25, 2023

6 Min Read
Are Off-Market Deals a Smart Self-Storage Investment Strategy?

Investors in self-storage and other types of real estate are dealing with uncertain times. The pandemic, unprecedented fiscal policies, supply-chain disruptions, a disjointed labor force and an international war have effectively created a “black swan” event with no comparable precedent to use as a template for what’s to come.

Knowing which push-pull dynamics will win out is nearly impossible with the factors at play. In the self-storage industry, these include:

  • Record-high consumer demand vs. sellers’ reluctance to relinquish properties

  • Compressed capitalization rates vs. rising interest rates

  • High liquidity vs. slimmer margins

One of the few certainties in this market is self-storage performance, which outstripped that of all other real estate assets through the recession as well as the pandemic. Our industry was able to operate through strategies like contactless services, reactive pricing and commercial-valuation measures. These operational tactics help owners and investors control their assets; and when dealing with an unpredictable future, the element of control is a critical business factor.

Control is also very attractive when it comes to facility acquisitions and dispositions. By reducing the number of parties involved in a real estate transaction, the remaining players have more of it. Therefore, whether you’re buying or selling, a great way to increase your level of influence in a transaction is to pursue an off-market deal, i.e., one that doesn’t involve any brokers or other middlemen.

The Broker Factor

Real estate brokers can be extremely valuable contributors to a self-storage deal. For sellers, they offer marketing and lead generation. Their network of buyers and visibility they provide can often garner the highest possible sales price. For buyers, the benefits are fewer. Brokers aren’t incentivized to negotiate a rock-bottom price because that would actively reduce their commission; and yet they control the communication between buyer and seller, and thus, are the negotiators in most scenarios.

In an off-market transaction, there’s direct contact between buyer and seller, which returns control to the parties who have the greatest interest in the outcome. That said, replacing the benefits provided by brokers requires more work by both parties. For example, sellers must be organized and ready to provide the documents necessary for the buyer’s underwriting. They must also understand the tax liability they face and know how to manage it. Buyers should be prepared to be flexible. They also need clarity on what can and can’t be done from an acquisition standpoint as well as what due diligence is required.

Within every problem is an opportunity for both parties to get creative and achieve what would otherwise be a deal-breaker if it was forced into the standardized structure brokers typically try to impart. With an off-market transaction, there are no “training wheels.” For better or worse, the buyer and seller need to align on the common goal of closing the deal. For that to happen, they must connect and communicate effectively.

A Different Type of Middleman

Navigating the off-market self-storage landscape can sometimes result in trading brokers for wholesalers—a different type of middleman—if effort isn’t made to avoid them. Wholesalers establish a contractual interest in purchasing a property and then, for a fee, assign that interest to an end buyer who steps into their shoes to complete the transaction. Their fee typically isn’t dictated by a percentage but rather by how much “meat is on the bone.” This allows them to chew away some of the equity they negotiate with the seller before leaving the rest to the assignee.

“For sale by owner” is typically the vehicle used to broadcast the desire to sell as a middleman. Nowadays, this is usually done on a website of some sort. In addition to requiring a fee, these sites are subject to public exposure similar to that of a broker-listed property. Thus, competing buyers can remove some of the control desired in an off-market transaction.

Still, there are opportunities to find self-storage properties on websites that aren’t typically used for this type of real estate. In fact, facilities sometimes appear on businesses-for-sale websites, but they’re often improperly valued and marketed as a result.

No Middleman

If you’re a buyer/investor, the best ways to avoid any middleman and retain the most control in your self-storage transaction are to look for a deal that will change the asset type or perform direct-to-seller marketing.

Asset reallocation is typically done via development. By taking vacant land or an existing, non-storage building and converting it to self-storage, you effectively create off-market inventory that has yet to be touched by market factors and middlemen. You have complete control over the end product since you’re involved in its genesis. Even if the raw asset is purchased on market, it won’t be affected by on-market factors in the same manner as a red-hot self storage acquisition. The cherry on top is, right now, the cost to build per square foot is often cheaper than the cost to buy an existing asset.

That said, the easiest way to avoid market factors is through direct-to-seller marketing. Self-storage facilities that are yet untouched by brokers and competing buyers can be found through direct mail, cold calling, site visits, online marketing, networking and other avenues. This approach is a blessing and a curse, though, because even though you’re able to generate your own leads, influence price and achieve a greater value-add opportunity, it requires a good deal of effort. To ensure your hard work pays off, your strategy must be tactical and tactful.

Also, marketing can be a bottomless money pit. Track your results with split testing, so you can identify the greatest positive impact from the least amount of effort. More money doesn’t necessarily equate to more leads.

Differentiating yourself through authentic, honest, quality marketing materials is the best way to receive positive attention. Know your target audience. Communicate with owners via the means and messaging that best fit their reality. Most likely aren’t thinking about selling because owning self-storage leads to a good life, especially these days. That residential real estate mindset of trying to identify the seller’s pain and leverage their distress doesn’t really apply to this industry.

Instead of marketing “the stick,” market “the carrot.” Speed, convenience and capturing market favorability are things that interest even the happiest self-storage owner. If you can truly become the best buyer possible, then you effectively become the prize. In other words, there are tens of thousands of facilities out there, but how many buyers are like you?

In times of uncertainty, any control you can muster serves as an anchor in the storm. If self-storage is your primary investment vehicle, off-market transactions offer greater power to buyer and seller. Control results in certainty; of that, I am sure.

Steven Wear is co-owner and chief marketing officer of Chicago-based Self Storage Syndicated Equities (SSSE), which provides access to tax-advantaged self-storage investments, with an emphasis on wealth growth and social stewardship. Under his guidance, SSSE has acquired dozens of self-storage facilities nationwide at an average of 28% discount to market value. To reach him, call 847.666.8885 or email [email protected].

About the Author(s)

Steven Wear

Director of Acquisitions, Impact Self Storage

Steven Wear is chief marketing officer and director of acquisitions at Impact Self Storage, which buys and develops storage facilities nationwide, and vice president of Titan Wealth Group, which sources and syndicates off-market storage deals across the country. He graduated from the University of Illinois at Urbana-Champaign and lives in Chicago. For more information, email [email protected]; visit www.impactselfstorage.com.

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