As self-storage has evolved into a highly profitable commercial investment, multiple buyers hunt for the best properties.
Begun as a niche of multifamily, self-storage has developed its own identity as a highly profitable commercial investment. While many mom-and-pop businesses still operate in the self-storage arena, commercial real estate investment trusts and institutional investors from universities to pension funds to the Blackstone Group are snatching up multiple deals in self-storage facilities, usually for the high-end, larger facilities in urban centers.
For example, in December 2015, Storage Pros Management sold 37 properties for $242.5 million to a joint venture led by an institutional investment firm. In another mega-deal, Morningstar Properties and Harrison Street Real Estate Capital sold 43 of its self-storage facilities for $315 million to the self-storage REIT Public Storage in October 2013. Annually, $2 billion of transactions in self-storage take place.
“Self-storage is the best performing sector of commercial real estate,” says C. William Barnhill, CCIM, owner of Omega Properties in Mobile, Ala. “Whether a CCIM is involved in brokering, building, managing, or owning self-storage facilities, it’s a great business.”
Since he entered the self-storage marketplace in 1993, Barnhill has managed, brokered, and sold these facilities. Currently, he owns about 3,500 units in the Mobile area and manages the brokerage for self-storage facilities in Alabama, Mississippi, and the panhandle of Florida.
Evolving Marketplace
Self-storage has returned 101 percent to investors from early 2008 to 2011, outperforming all other REIT categories, according to data compiled by Bloomberg. Every year at least 11 million people in the U.S. stash some of their possessions into storage units.
“People own a lot of things and inherit things that they don’t want to lose,” Barnhill says. “Through the years, we have had both population growth and more people learning how to use storage.”
For instance, major life events often involve greater demand for self-storage, such as birth, death, marriage, divorce, building a home, renovating a home, or downsizing a home.
“The self-storage market is constructed like a pyramid with mom-and-pop owners of one to five properties at the bottom half and the top 12 percent is owned by REITs,” says William Brownfield, CCIM, CRE, of Brownfield & Associates, LLC, in Houston. “In the middle, regional players are building new properties and buying the best mom-and-pop properties. They fix up the properties, standardize them, and may eventually sell them to REITs.”
As storage has evolved, many of the facilities have changed from bare-bones, concrete-and-corrugated-aluminum shells into more attractive, climate-controlled facilities with LED lighting, which blend into good neighborhoods and offer tenant insurance.
Thriving Marketplace
Once specializing in the office marketplace, Larry Goldman, CCIM, entered self-storage 18 years ago and has never looked back. “I prefer ugly properties with pretty financial statements versus pretty properties with ugly financial statements,” says Goldman, self-storage investment properties specialist with the Argus Self Storage Sales Network and president of the Kansas Self Storage Owners Association in Overland Park, Kan.
During the past five years, per capita, the need for self-storage has grown from 7 feet to 8.4 feet. The five-year average total return on publicly traded storage REITs was 24.4 percent compared to 20.6 percent for multifamily and 12.7 percent for office, according to Goldman.
He covers a broad swath of the Midwest self-storage market, which includes Arkansas, Missouri, Kansas, and Illinois. Currently, Goldman calls it a sellers’ market, which has seen strong rate growth, occupancy growth, and fewer concessions for buyers during the past few years. However, he believes by 2018 that capitalization rates will be higher, and the cost of capital will increase as interest rates rise.
“The question is how much longer will the feeding frenzy continue as today’s developers may be late to the cycle,” Goldman says. “Similar to other commercial real estate property types, self-storage is a cyclical business, and I have seen the herd mentality lead to overbuilding.”
In Alabama and nationwide, Barnhill expects self-storage to be strong for another 1.5 to 3 years. Like all commercial real estate sectors, self-storage is cyclical. “The real risk in self-storage investments comes from higher interest rates and overbuilding,” he says.
Recognizing that the self-storage market was peaking in 2005, Barnhill locked in 10-year financing through commercial mortgage-backed securities loans and is now refinancing for the next 10 years at even lower interest rates. He also is upgrading the quality of his self-storage facilities and constantly refines his marketing tactics.
“We do internet marketing, including search engine optimization, buying keywords, and formatting for mobile phones, as well as using algorithms to manage our properties,” Barnhill says. “Now we have to aggressively market because there is so much competition and demand is high.”
Self-storage users roughly divide between 20 percent for businesses and 80 percent for individuals, according to Brownfield. The need spans the socio-economic spectrum through good and bad economic cycles, and the industry is often described as recession-resistant.
While Mike Patterson, CCIM, entered self-storage just four years ago, he says the market “makes sense and uses tools from CCIM courses.”
Based in Carrollton, Ga., Patterson describes self-storage as recession resistant. “If you manage cash investments in self-storage well, it’s hard to get in trouble,” says Patterson, commercial broker at Commercial Realty Services of West Georgia. “Cash flow gets better, and the rents go up. It’s almost impossible to fail unless you borrow yourself into problems.”
Collaborating for Success
Many of the CCIM designees involved in the self-storage industry have joined Argus, a nationwide brokerage network for self-storage facilities headquartered in Aurora, Colo. About 40 brokers across the country share information and cover different markets under the Argus umbrella.
These Argus broker affiliates reported $250 million in sales for 2015 and currently have $155 million of self-storage properties listed in 26 states and more than 65 individual markets. Of the more than $450 million in recent sales transactions, facilities ranged in price from $300,000 to $80 million.
Shortly after Barnhill entered the self-storage market, he joined Argus, which has helped him to develop a national perspective of the industry. “Belonging to Argus has helped me to gain recognition nationally and to build relationships with REITs and other big players in the industry,” he says. “Within our Argus network, we call each other and ask for advice on transactions and with clients, which provides for a lot of synergy.”
Becoming part of self-storage and Argus can happen organically for CCIMs who were in other sectors of commercial real estate. Patterson entered self-storage through a client who owned storage units along with many other properties. His client introduced Patterson to individuals at Argus in 2012, and he became involved as a result. Brownfield was initially introduced to the industry in 2008 by an office building partner who had some self-storage units. At about the same time, the founder of Argus, Mike McCune, approached him about becoming an Argus affiliate.
“Self-storage has an entrepreneurial culture, which is a lot more fun than office, as I am generally dealing directly with the deal makers,” Goldman says.
He also attributes his affinity to the self-storage industry in part to his development of analytical skills through CCIM training and CCIM resources such as STDB.
Unlike other sectors of commercial real estate, self-storage facilities are low maintenance and less costly to build. With demand increasing steadily and new inventory still lagging, the marketplace provides good investments from small individual investors to large investors such as pension funds and REITs. While self-storage experts anticipate at least 18 months of strong growth, the down cycle will be softer than other industry sectors. People need extra storage in good times and bad.
Best Return on Investment
The self-storage market has “meaningful runway left with lots of demand,” according to Ben Vestal, president of Argus Self-Storage Sales Network in Aurora, Colo. Nationally, occupancy rates are north of 90 percent, and revenue growth of 5 to 7 percent is expected in 2016, he says. Vestal expects 2017 to be stable, as well, while in 2018 and 2019 the self-storage market will start to flatten out.
“At Argus, we expect 18 to 24 months left of capital appreciation in the market,” he says.
Currently, growing demand coupled with high barriers to entry and relatively low construction costs creates a winning formula for investors. As a result, Vestal has seen more institutional investors enter the sector and more consolidation of self-storage facilities. “This has led to very aggressive prices being paid for self-storage projects today,” he says.
National trends include improving professional management, enhancing internet marketing for self-storage facilities, optimizing websites for mobile phones, selecting better locations, and building more attractive, climate-controlled facilities. It’s becoming a retail environment, according to Vestal. Today professional self-storage management encompasses revenue management, tenant insurance, street awareness programs, and digital marketing.
“Some of the most important real estate is on the web,” Vestal says. “Those who operate self-storage properties today need to make sure to be easily accessible to prospective tenants, especially on their mobile phones.”
The industry is maturing and changes in generations are building demand nationally. For example, more baby boomers are retiring, and millennials are moving back to the cities.
“Those demographics need storage at different times,” Vestal says. “Self-storage is recession resistant and is resilient through good and bad times. Today’s storage market is driven both by more users and more investors.”
He cautions investors to pay attention to overbuilding and be diligent in researching self-storage locally. “Self-storage is a local industry, and prospective investors should look within a three- to five-mile radius,” Vestal says.