Self-storage may not be the sexiest sector in real estate, but it has piqued the interest of Wall Street. The four publicly traded self-storage real estate investment trusts (REITs) have been turning in impressive results, buoyed by higher occupancy rates and higher rents.
As a result, private investors have sat up and taken notice of the self-storage sector, which is dominated by mom-and-pop operators. Many private self-storage owners have been eager to sell, and even more investors have been eager to buy.
“In self-storage, the whole country is doing very well right now. There’s no area that’s hurting,” said Charles LeClaire, senior vice president for investments in the National Self-Storage Group at commercial real estate firm Marcus & Millichap.
While self-storage holds appeal as an investment class, the return on your investment likely will take years to be realized. In other words, this is not a get-rich-quick scheme.
“The asset class is much more complex than a generation ago. In the last boom construction cycle, there was a mentality of ‘build it and they will come,’ leading to over-supply,” said Chris Sonne, executive managing director of the Self Storage Industry Group at commercial real estate firm Cushman & Wakefield.
Experts advise would-be investors to follow these 12 steps for achieving success in the self-storage sector.
1. Consider geography. Pay attention to the self-storage market within a three- to five-mile radius of a facility, said Aaron Swerdlin, executive managing director of the Self Storage Group at commercial real estate firm NGKF Capital Markets.
“Supply-and-demand fundamentals are dynamic by trade area and can vary significantly among trade areas, even in the same city,” Sonne said.
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2. Look at the location. Figure out where your competitors are and, if possible, where your competitors are planning to be, LeClaire said. A facility that’s set back from the road and isn’t very visible could be performing well, he said, but a rival could swoop in and build a better-positioned facility nearby, “and all of a sudden your occupancy starts to drop.”
3. Hire a specialist. Use a qualified real estate broker who’s knowledgeable about self-storage.
4. Be patient. Often, it can take four or five years for a facility to “stabilize” after it’s been purchased.
“Anytime ownership or management changes, you’ll go backward for a few months, then hit your stride before outperforming what had been achieved before,” Swerdlin said.
5. Ignore physical occupancy. A facility could have a physical occupancy rate of 95%, Swerdlin said, but the economic occupancy rate actually is 75% because rent for existing tenants hasn’t been raised in several years.
In this case, he said, the pertinent question is this: “How much money is making its way to the bank every month?”
6. Realize what the investment really involves. When you’re buying a self-storage facility, you’re not just buying a piece of real estate, Swerdlin said. You’re buying a business that must grapple with issues like revenue management, SEO and lead generation.
“You can’t just stick a manager in the office eight hours a day and have them answer phones,” Swerdlin said. “It’s a higher level of involvement than most people assume.”
7. Evaluate the staff. Do background checks on employees you plan to keep to make sure they’re “honest and forthright,” LeClaire said. Also,visit with customers to gauge their impressions of the staff.
8. Scrutinize the manager. Unfortunately, according to LeClaire, it’s far too easy for a manager to be deceitful by pocketing cash from tenants or engaging in other misdeeds.
“There’s a lot of great managers out there, but there are a lot of bad managers,” LeClaire said. “They’re the ones who can make or break your facility.”
9. Review the records. This includes combing through the facility’s bank deposits and other financial documents so you can ensure the seller is “on the up and up,” LeClaire said.
10. Examine the structure. Watch out for deferred-maintenance problems like leaky roofs or mold, LeClaire said.
11. Separate yourself from the rest of the buyers. That’s especially true if you’re purchasing a facility in a primary or secondary market, Swerdlin said. “It’s extremely competitive,” he said. “The only way to win is to pay the most.”
12. Concentrate on secondary and tertiary markets. The commanding presence of national and regional players makes it tough to compete in primary markets, LeClaire said. One facility alone in a primary market could cost $4 million or more, he said, while a facility in a secondary or tertiary market could go for $1 million to $2 million.
John Egan is editor in chief at SpareFoot, which operates the country’s largest online marketplace for self-storage.