Question #
What should investors consider regarding CAP rates and rental projections when evaluating storage funds?
Answer #
A drop in a future CAP rate in the Proforma, or a rental increase in the Proforma that may be higher than the current market but “we are sure we can achieve that,” or a slight increase in the lease-up projections, all can make a project look great on paper.
I remember calling one fund about a market we were in, and they were coming in with a huge shadow-casting 100,000-plus building.
I got hold of the fund manager (a real feat in itself) and had a frank discussion about how this was going to be way overbuilt once they came online and, with the construction cost of over $120 psf (I saw their plans from the county approval process, which is public information) and the current rental rates, which would only drop when they came online, there was no way they were going to be profitable.
I must have gotten him on a good day because he agreed with me.
But he said, “I know you are right, but we are going to do the deal anyway.”
How would you like to be an investor in that fund?
So yes, I am on it with many storage funds.
And when I see our industry I love so much with a black eye, as I do more and more these days, I decided to do this episode to hopefully help purge myself of some of my resentment.
Now I have invested myself in funds as I have taken profits off the table, so I am not against funds as a whole.
Just what I have seen a lot in this industry with some fund practices.
And if you are going to invest in a fund, do your homework.
Make sure you are comfortable with the CAP rate used for future values.
An extreme amount of overall return is calculated right there.
Know the rental rates yourself in the market as well as the trade area the project is going to be located in.
