Self Storage Conversions
Industry forecasts all point to continued demand for self storage development. New building activity has been especially robust the last five years. We might look back at 2018 as the top of the new building cycle. The April Yardi Matrix National Storage Report states they are following more than 2,000 new storage facilities now in the pipeline. There are a few factors that might limit new ground up development moving forward. Construction and land costs are rising and some lenders are tightening their lending criteria.
Some of the best investment opportunities in self storage may be from converting existing vacant buildings. Value Added or Adaptive Re-Use projects offer a number of advantages including: lower costs than building a new facility, increased speed of bring self storage units to the marketplace and better locations with right demographic base. Another important factor is Sustainability. Communities may see more value in a self storage project that makes efficient use of existing buildings, than the environmental impact of new construction.
From surplus retail space to bowling alleys, we saw many recent examples of investors/owners using creative approaches to expand self storage inventory. One company pursuing this strategy is Fairway America LLC, a private real estate equity firm. They recently launched a self storage acquisition fund that focuses on conversion of vacant retail space into Class A Self storage properties. “The market is prime for adaptive re-use of vacant big-box retail property into a variety of uses, and we think self-storage makes the most sense. There is often an undersupply of self-storage in areas that have historically not allowed this type of use," said CEO Matthew Burk. The company has found that the self storage conversion projects have lower risks, reduced construction costs and improve their ability to bring the project online quickly.
Adaptive re-use of retail space was one of the largest development trends in 2018. A prime example of this trend was the conversion of Kmart and Sears stores by U-Haul International. After Sears filed for bankruptcy in October, Amerco, the real estate arm of UHaul International paid $62 million for 13 stores. A driving factor for this acquisition was U-Haul Corporate Sustainability Initiatives. U-Haul supports communities by investing in infill developments that lower their carbon footprint and reduce energy resources that would be used by building new properties.
One such project is the conversion of a former Kmart store in Columbus. GA. “This location is perfect for U-Haul because it’s in the center of the city and just a few miles from Columbus State University,” said Rogar Bishop, U-Haul Company of Southern Georgia president. Adaptive reuse of the former retail property will deliver about 700 self-storage units. “Reusing old buildings has been a U-Haul staple for decades,” Bishop noted.
Did we mention bowling alleys? PWM Properties purchased the 15,000 square foot Sonora Family Bowling alley in Sonora, CA. The bowling alley that had been empty for almost a decade sold for $375,000. The existing zoning did not allow for self storage properties. Other types of development had been considered, but cost of adding parking was cost prohibitive for other uses. In April, the Sonora Planning Commission approved plans for 100 self storage units. The developers plan to create a new use for the property with minimal destruction of the existing structure and preserving the unique architectural style of the existing building was key to winning approval.
What should be your first steps to consider a self-storage conversion project? It is important to understand the demand for self storage in the market, and determine if an acquisition of an existing property might be a better investment. Additionally you must understand what the actual costs to convert the existing building will be and what investment capital will be required. It is a big decision with many factors to consider. Southeastern Business Intermediaries is here to help you. We can guide you through all stages of the project from feasibility analysis, obtaining capital and completion of construction.
Better to Expand or Sell in a Sellers Market- Your Options
In the popular TV show, “Love it or List It” homeowners face an important decision- renovate their current home or sell it for a larger residential space. Self Storage owners also face a similar decision. In our current “sellers market” does it make sense to expand your current facility or sell and take advantage of premium pricing? Every owner faces individual personal and business challenges that make their decision unique. But let’s take a look at some of your options.
The Selling Option
Your facility is almost fully leased, cashflow is great, and you have been able to raise rents for existing and new tenants the last three years. What is not to like? Industry veterans will tell you- now is not the time to get complacent. Investors carefully study real estate cycles and are attracted to the current returns from self storage facilities that are not available from other property types. If you act now you will receive the highest value for your property
What is the downside to waiting? Buyers and investors are concerned about the oversupply of self storage units and the negative impact this will have on rates. The recent Yardi Matrix National Report concluded that rates are declining in most markets. For example, the rental rates for climate control units in Denver declined by 7%. New competitors are focused on leasing up their property as quickly as they can. Usually this means aggressive rental rate discounts, and free storage for at least a month. It will be difficult for storage owners to continue to increase rental rates at the same pace they have for the past few years.
" For a self storage facility with an annual NOI of $200,000, a cap rate increase of 25 basis points will reduce the starting selling price by over $100,000!"
Current Industry forecasts point to a slight compression of cap rates. This could change quickly if interest rates start to rise. This has a dramatic impact on the pricing of your self storage facility. For a self storage facility with an annual NOI of $200,000, a cap rate increase of 25 basis points will reduce the starting selling price by drop by over 100,000!
The good news is that buyers are aggressively looking to acquire well- performing self storage facilities. We are constantly surveying the buying interest of our network of more than 200 self storage buyers. Not only are they interested in facilities in major markets, there is also increased interest in secondary and even tertiary markets. A strong incentive for our self storage buyers is potential for expanding a facility. Unused acreage with proper zoning is particularly attractive. What does this mean for you? There are motivated buyers for your property that understand that they will need to pay top dollar for your facility.
If your self storage units are completely leased at market rates, where can you generate more revenue? You can think about building an additional building or convert traditional storage to climate control units. This would involve investing more money in the property. A more risk adverse and profitable decision may be to sell in the current positive market while maximum pricing is available.
When to Expand Your Facility
If you want to expand your facility you should not wait until you are fully leased. Triggers to expand include new competitors building upgraded facilities in your market, changing market demographics and demand for different unit mixes. You may want to build another building if you have the land and proper zoning for expansion.
Some self storage facilities are growing vertically. Vertical self storage facilities have been a major industry trend for a number of years. If you want to add another story you will need to determine whether your building is in good condition, has a strong foundation and is up to code.
Public Storage Expands Upwards in Houston
When Houston was ravaged by a Hurricane Harvey there was a need to rebuild self storage facilities. Public Storage had to redevelop self storage sites that we,re originally constructed in the 1980’s. This involved relocating entire buildings to higher ground, improved drainage, and adding 43% more storage units at the same locations. One-story facilities were expanded upward into multi-story Public Storage Orange locations.
“We had a commitment to stay in the community, and we didn’t hesitate,” said Tim Stanley, Senior Vice President of Capital Investments. “The wrecking balls were out within a week after the storm, with plans to reinvest. We moved as fast as we possibly could.” “If you want to be in a competitive marketplace, you better have competitive product, and we have done our best to put our best foot forward,” said Stanley.
Expansion Option- Climate Controlled Self Storage
Consumer demand for climate control storage units is increasing. Renters want to make sure their valuable and sometimes irreplaceable possessions are protected from temperature changes and moisture. Self storage developers are excited about climate control because it means more revenue and profit. Some estimates say that climate controlled units can provide a 30% premium to traditional unit rates. There are also additional climate control profit areas- facilities can also offer- wine and art work storage.
While construction costs are cert- ainly higher for climate controlled units, you will find they lease faster and provide more revenue. What’s involved with adding climate control units? It is all about the insulation. It would be important to hire an arch- itect or mechanical engineer to guide you through the process.
The industry standard temperature range for climate control storage is 40 degrees F to 90 degrees F with 55 to 60 percent humidity. Main- taining the proper temperature and moisture levels will depend on the insulation. Insulation considerations include ceiling height, size of the facility air filtration. If your building already has HVAC the expansion process may be easier because your building may already be insulated.
Expansion Option-Boat and RV Storage
Is your facility located near a lake or beach? Boat and RV storage has been an important component of the self-storage development boom. One advantage to adding Boat and RV storage to your existing facility is the ability to attract new clients. Many traditional storage renters may have a temporary need to store personal belongings during a transition. Boat and RV owners are looking fior a long term storage solution. They have made a significant investment in their vehicle and understand the need to protect their valuable treasured purchase.
Their storage options are often limited. Many residential subdivisions have restrictive policies against Boat and RV vehicle parking. This is driving demand for owners to find secure parking and storage for their valued possession. The downside of adding Boat and RV parking is the fact that these spaces are large and can quickly absorb your available space. The average size for an enclosed RV unit is 14 x40. Boat storage average 12 x 26 feet.
Another factor that must be considered is wider drive aisles, because these vehicles need extra space to maneuver. You can obtain a higher rental rate if you offer enclosed parking- which can be fully enclosed structure or a canopy/ roof structure.
In conclusion, there are many options available to realize the full investment potential of your property. For a limited time you can quickly receive the top price by selling your facility. Expanding you facility to generate more rental revenue is another option but will require additional risk and capital. The good news is we can help you better understand the value of your facility in today’s market and allow you to make a more informed decision.
Benefits of Off Market transactions
The number of off market commercial real estate transactions has increased dramatically in recent years. According to RE Wealth Advisors- 23% of all commercial real estate transactions in the US were transacted ‘off market’. Off market transactions offer many advantages for buyers and sellers of commercial real estate.
What is an off market real estate transaction? Commercial properties offered off market are not publicly listed for sale- they are presented privately to a selected group of investors/buyers. Some describe this as a laser targeted approach rather than a spray and pray shotgun effort.
Many owners prefer the private nature of an off market approach to prevent any disruption that could impact tenants, employees or vendors from learning about a pending sale. An off market listing helps owners protect the reason they are selling their assets from public view. These reasons could be the financial condition of the owners or problems with the facility. Facilities with selling obstacles benefit from the off market approach because brokers can target buyers who are not fazed by certain selling challenges.
Another major advantage for the owner is pricing protection if the property does not sell immediately. With a public listing, properties on the market for a period of time are perceived to be over valued or may have potential problems. In this situation Investors would have all the leverage and demand substantial reductions in price. The off market approach preserves the ability to not need to decrease the asking price in future transactions.
Institutional buyers, REITS, and large investors will obviously look at any property that fits their investment requirements, but they are likely to be more interested in off-market deals. There are a number of reasons for this preference. With their size, recourses and ability to close quickly, these investors expect that prime investment opportunities would be privately presented to them. In a public listing they feel that they are competing with smaller buyers that are driving the price upwards.
One investor with a preference for off market opportunities is Griffin Capital. They state on their website, “…and compensate brokers that bring us high quality acquisition opportunities (preference given to "off-market" solicitations." Another example is DealPoint Merrill. They describe their approach on their website, “Our growth and income co-investment objectives generally prefer the purchase of “off market” projects where we can.”
On market properties are publicly listed for sale -usually by a large brokerage firm and promoted on public online listing services. Our off market approach would start with a review of your property and recent financial performance and your goals to be achieved through the sale. With our knowledge of the self storage market and our extensive buyer network we can establish a selling price that maximizes your investment and will result in a closing. Our motivation is not to “get a listing”, but to get your property sold quickly at the right price.
Is It The Right Time to Raise Rents
Thousands of new self storage facilities have been developed over the past three years with more in the pipeline. Yardi National Matrix is now following over 664 storage facilities now under construction. The consensus is that this frenzied pace of construction activity is finally slowing, with the exception of the West Coast and under supplied Northeast markets.
Investors/Buyers acknowledge that certain markets are reaching the overbuilt phase of the cycle. One negative impact from this overbuilding is rental rate compression for existing owners. Rental rate reductions in many markets is causing concern for existing storage owners and investors alike. The May Yardi Matrix National Self Storage Report states that storage street rates overall declined 1.7% year over year in April for 10 x 10 non- climate units. The rates for climate control rental rates declined even more- 2.2%.
This trend is not limited to just a few markets. According to Yardi, more than 50%of the top markets experienced rate declines. As with any real estate investment, It is important to understand the dynamics of each market. For example Charleston, South Carolina had the largest decline in rates at 7.6% for 10 x10 non –climate units. Charleston is starting to see the effects of high penetration and continuing new supply.
According to Yardi Matrix, the Portland market is still the leading storage development market with 25.1 % of their total inventory in new construction. Area experts feel that increasing population and a strong economy will allow Portland to absorb the new development. However rental rates are declining on a year over year basis of 5% for non climate and 7% climate control. These are some of the largest declines among major markets.
Not all markets are seeing rental declines. Atlanta is one market that has so far has escaped this trend. Atlanta was one of the few top markets where rental rates were either flat or increased rental rates slightly decreased. Rental rates for 10 x 10 non climate were flat and climate control unit rates increased by 2%.
How should owners compete with new completion entering their market offering lower rates. Is discounting rates the best strategy? One option is to ignore the competition and focus on retaining the tenants you have. Many tenants will not want the hassle of relocating their valued storage contents to the new shiny object just to save a few dollars. One of the largest self storage owners, Public Storage prefers to avoid discounting based on overbuilding in one of their markets. They may provide a free month of rent or other non rental rate incentives.
All self storage owners should be aware of competition in their market and especially new facilities coming into your market. On the most basic level, this would include a regular survey of advertised rates on competitor’s websites. Even better would be an established revenue management program. What is a revenue management program?
A revenue management program is your strategic process to constantly manage the pricing of your units relative to the market to maximize your return. We frequently speak with owners who have tenants that are priced below market, and/or are hesitant to raise prices on existing customers. This can be especially hard if you are in a market that is experiencing robust new supply. Fortunately you do not need to make these important decisions in a vacuum. There are a number of revenue management software and consultants available.
How often should you change your rates? In a recent article in FSSA Inprint, published by the Floridas Self Storage Association, Warren Leibman , President of Veritec Solutions, presented excellent research on pricing trends in self storage. The author found that with technology, self storage owners can easily check competitor’s web- based rates and quickly react to changes in the market. He researched 10 companies that represented more than 100 stores. His conclusion was that the operators employed a wide range of pricing strategies.
For example some companies rarely change their pricing, while one company changed their move-in prices multiple times per week. The size of the price changes also varies. The average price change ranged from 4 percent to 11 percent for the ten companies in the study. But the larger companies made many small price changes. For example, 21% of the changes by one company, were 1% or less. Mr Leibman stated, “ In our work with a variety of self-storage companies, we are finding that more and more operators are becoming more systematic with respect to incorporating competitor prices into their own pricing tactics to ensure their competitive position is appropriate.” Please click here to read the full article.
In conclusion, increased supply is pulling down street rents in most markets. Existing owners need to study their pricing structure and the market to make informed decisions on how to be competitive yet still maximize revenue from current tenants.
Self Storage Owners Reduce Tax Bill with 1031 Exchanges.
Many owners we speak with are excited about selling their property at record prices but are still concerned that they will end up with a big bill to “Uncle Sam”. Every self storage owner should discuss all tax consequences of selling real estate with their accountant, CPA or financial advisors. There is no universal tax strategy that works for everyone. One popular option is a 1031 Tax Exchange.
The 1031 Exchange is not a new program, originally used in the 1920’s by cattle farmers to reduce their tax expenses. The benefit of a 1031 Exchange is the ability to defer capital gain taxes when selling real estate property. Through a 1031 exchange you can sell your real estate property and defer capital gain taxes through the purchase of another property. The tax is transferred to another investment. The government allows the tax deferral because it sees this strategy as the continuation of your investment.
There are four types of 1031 exchanges; simultaneous, forward, reverse and improvement. A simultaneous exchange involves closing on the sale of your property at the same time you purchase a new like-kind property. What is a like- kind property? Like- kind property can basically be any other investment real estate property, with the exception of your primary residential property.
A forward exchange is much more common than a simultaneous exchange. You close on the property you are relinquishing and purchase a new investment property within a specified period of time. You need to identify the property with 45 days of the closing date of your property and you need to purchase the new property within 180 days. In a reverse exchange a replacement property is identified before the original property is relinquished. A self storage owner would sell their property to a Qualified Intermediary first and then purchase the identified property for exchange.
An Improvement Exchange can be combined with a forward or reverse exchange. This strategy allows you to make improvements to the replacement property while completing the exchange process on the relinquished property. This is a more complex transaction and will need the expertise of a QI. What is a Qualified Intermediary? A qualified Intermediary is a third party organization that facilitates 1031 exchanges. A qualified intermediary (QI) will sell the relinquished property, collect the proceeds from the property sale, and use those funds to acquire a replacement property.
The 1031 Exchange is a great tool to reduce your tax consequences from selling your facility. But do not try this at home. Please contact your tax advisors and hire an experienced Qualified Intermediary.