Thanks to pent-up demand and more readily available construction financing, the self-storage industry experienced a significant uptick in ground-up development projects over the past two years. For those who managed to locate reasonably priced parcels in suitable markets with agreeable building committees, erecting new, sophisticated self-storage facilities with all the bells and whistles was a logical decision.
Though the need for additional self-storage supply was clear, the construction boom was also spurred by a lack of existing Class-A properties on the market, especially within the top metropolitan statistical areas (MSAs) as REITs and other large operators had been aggressively acquiring them.
Instead of looking for acquisitions in secondary and tertiary markets, some self-storage operators focused on acquiring conversion projects and “value-add” or “management turnaround” facilities.
Dave King, vice president self-storage at Phoenix-based Wentworth Property Company, often seeks out the latter within what he calls “secondary-plus” markets. Hedefines a “secondary-plus” market as a heavily populated area, typically with a minimum of 60,000 to 70,000 residents within a three-mile radius, where the average household income is at least $60,000. King adds that Wentworth Property Company will consider a market with a slightly lower average income if the area’s population is significantly greater than 70,000 residents.
Secondary-plus markets are likely to be the surrounding area(s) or suburbs of primary markets. For instance, King classifies several suburban cities outside of Phoenix, Ariz., as secondary-plus markets. According to the 2018 Self-Storage Almanac, the Phoenix-Mesa-Scottsdale MSA is the 12th largest MSA in the United States; it has approximately 5.52 square feet of storage space per capita.
While the REITs and larger self-storage operators have primarily focused on establishing their presence within top MSAs like Phoenix, and they have the necessary funds to dominate the largest markets, King notes that the secondary-plus markets can have more opportunities for them.
“There are decent deals to be had in No. 26 to 100,” he says about the United States’ top 100 MSAs.
A Focus On Fixer-Uppers
Of the 28 transactions that Wentworth Property Company has closed on, half have been value-add or management turnaround properties. King states that this type of acquisition presents several benefits. For starters, there is less risk than a new build.
“Occupancy is already there,” says King, who adds that most of the value-add properties have occupancy rates between 70 and 90 percent. “That takes out some of the risk.”
Conversely, new developments can take a long time to reach stabilization. Therefore, the risk is higher with ground up development.
Value-add acquisitions are often less expensive per square foot to buy than a new development is to build. On a good day, the cost of buying an infill location ranges from $50 to $90 per square foot, whereas the cost per square foot for a ground-up facility could easily run higher than that, especially as prices for metal materials rises and labor is in short supply.
King goes on to say that value-add and management turnaround facilities can provide a faster return on investment partly because renovations are less time consuming than constructing a brand-new facility. “Our goal is to increase the value quicker than we are able to do with new development,” he adds.
Opportunities For Improvement
The approaches for increasing value vary, but they all revolve around enhancing the facility’s standards, efficiencies, and operations. King suggests looking for deferred maintenance issues as well as ways to improve customer service. Essentially, the goal is to bring a dated facility up in overall quality in order to increase the rental rates and, in turn, overall revenue to the property.
Although you can’t move the facility’s physical location to a busier street, opportunities to increase the site’s visibility may exist. First, King advises new owners to ensure the signage is in clear view. Vegetation that blocks the sign should be removed and burned out lightbulbs should be replaced.
Additionally, set aside some time and funding to make the exterior of the facility more eye-catching. While the city likely has guidelines and restrictions, a fresh coat of paint and decent landscaping can be enough to cause it to stand out. King also recommends sprucing up the parking lot and drive isles by fixing pot holes, applying a new sealcoat to the pavement, re-striping the spaces, and purchasing bollard covers.
Security systems and access control features are two other wise investments when fixing up a value-add property. Cameras, gates with keypads, and individual door alarms could be installed or upgraded to make the facility more secure. Restricting floor-level access and elevator access is another consideration. All of these items enable operators to charge premium rates and better protect tenants’ stored goods.
As for deferred maintenance, King reminds buyers to carefully inspect the buildings’ roofs, HVAC systems, and roll-up doors. It’s essential that these building components are in good condition and functioning properly to keep stored items from inadvertently being damaged from water leaks and/or uncontrolled temperatures. Repairs and replacements should be made as needed.
On the operations side, buyers should look closely at the facility’s office for ways to create efficiencies. Organizing the office and keeping it clean is a good starting point. The furniture in the office should be arranged to produce a welcoming and comfortable atmosphere and a good flow. If a large, designated retail area is not an option, clear a small space on the wall to sell packing, moving, and storage supplies. “The margins are great on that stuff,” says King, “even if you don’t have room to sell a ton of it.”
Next, evaluate the management software. Does it need updated, or is there a better option that will meet your needs? Take some time to learn the system, then set up any automations that will streamline processes and assist your self-storage manager. Consider utilizing technologies and services, such as kiosks and call centers, that enable managers to focus their attention on walk-in customers.
In addition to creating efficiencies, new operators should consider opportunities to reduce expenses. LED lighting, timers, and motion sensors can slash the facility’s electric bill. Upgrades to bathroom fixtures and sprinkler systems can cut water usage with low-flow aerators. What’s more, utilizing cloud storage and other electronic alternatives can lessen the amount spent on office supplies.
Last, but certainly not least, King proposes increasing the facility’s marketing. “Spend more on marketing,” he says. Be sure to tout the numerous improvements you make to the property in your marketing messages!
Before You Buy
Even though value-add properties can be good investments, King warns potential buyers not to overestimate the market’s “rent ceiling”. “Make sure your expectations are in line with the area,” he says. In other words, don’t let your improvements be made in vain. If the customers aren’t willing to pay a premium for high-tech security or climate-controlled features, there’s no point in installing them. Therefore, be sure to shop the local competition and/or conduct customer surveys before making improvements to know what’s a hit and what’s a miss with the clientele.
Taxes are another item to thoroughly investigate prior to purchase. King mentions that property tax reassessments can significantly impact the project’s feasibility. A large bump in property taxes can quickly deflate the potential of a new investment.
“Buying existing self-storage sites is a great way to get into the business,” says King, “but very challenging and time consuming. It’s not as easy as it looks. Look for people with experience to guide you.”
Insert sidebarTop MSAs In The U.S.
According to King, the top 25 metropolitan statistical areas (MSAs) have fewer opportunities than MSAs 26 to 100. Below are the 75 markets with “decent deals to be had” (as listed in Tables 11.2a and 11.2b of the 2018 Self-Storage Almanac).
27. Sacramento–Roseville–Arden-Arcade, CA
28. Cincinnati, OH-KY-IN
29. Las Vegas-Henderson-Paradise, NV
30. Kansas City, MO-KS
31. Austin-Round Rock, TX
32. Cleveland-Elyria, OH
33. Columbus, OH
34. Indianapolis-Carmel-Anderson, IN
35. San Jose-Sunnyvale-Santa Clara, CA
36. Nashville-Davidson–Murfreesboro–Franklin, TN
37. Virginia Beach-Norfolk-Newport News, VA-NC
38. Providence-Warwick, RI-MA
39. Milwaukee-Waukesha-West Allis, WI
40. Jacksonville, FL
41. Oklahoma City, OK
42. Memphis, TN-MS-AR
43. Raleigh, NC
44. Louisville/Jefferson County, KY-IN
45. Richmond, VA
46. New Orleans-Metairie, LA
47. Hartford-West Hartford-East Hartford, CT
48. Salt Lake City, UT
49. Birmingham-Hoover, AL
50. Buffalo-Cheektowaga-Niagara Falls, NY
51. Rochester, NY
52. Grand Rapids-Wyoming, MI
53. Tucson, AZ
54. Urban Honolulu, HI
55. Tulsa, OK
56. Fresno, CA
57. Bridgeport-Stamford-Norwalk, CT
58. Worcester, MA-CT
59. Omaha-Council Bluffs, NE-IA
60. Albuquerque, NM
61. Greenville-Anderson-Mauldin, SC
62. Bakersfield, CA
63. Albany-Schenectady-Troy, NY
64. Knoxville, TN
65. New Haven-Milford, CT
66. McAllen-Edinburg-Mission, TX
67. Oxnard-Thousand Oaks-Ventura, CA
68. El Paso, TX
69. Allentown-Bethlehem-Easton, PA-NJ
70. Baton Rouge, LA
71. Columbia, SC
72. Dayton, OH
73. North Port-Sarasota-Bradenton, FL
74. Charleston-North Charleston, SC
75. Greensboro-High Point, NC
76. Little Rock-North Little Rock-Conway, AR
77. Stockton-Lodi, CA
78. Cape Coral-Fort Myers, FL
79. Colorado Springs, CO
80. Akron, OH
81. Boise City, ID
82. Lakeland-Winter Haven, FL
83. Winston-Salem, NC
84. Syracuse, NY
85. Ogden-Clearfield, UT
86. Madison, WI
87. Wichita, KS
88. Deltona-Daytona Beach-Ormond Beach, FL
89. Des Moines-West Des Moines, IA
90. Springfield, MA
91. Toledo, OH
92. Provo-Orem, UT
93. Augusta-Richmond County, GA-SC
94. Jackson, MS
95. Palm Bay-Melbourne-Titusville, FL
96. Harrisburg-Carlisle, PA
97. Durham-Chapel Hill, NC
98. Spokane-Spokane Valley, WA
99. Scranton-Wilkes-Barre-Hazleton, PA
100. Chattanooga, TN-GA
Erica Shatzer is the editor of Mini-Storage Messenger, Self-Storage Now!, and Self-Storage Canada.