I’m starting to see the distressed self-storage listings.
I said they were most likely coming, and I am starting to see a trickle of them, soon to be more.
Keep your eyes open.
Example:
Yesterday I saw a listing, unpriced, of course, with a call for offers.
It was a completed facility of close to 50,000 sq. ft.
I could tell that it was underwritten at 4% interest and most likely a 5.5% or 6% CAP rate for reversion pricing in order to get the construction loan.
All 50,000 sq ft were built (mistake), and they were about 5% physically occupied and 1% to 2% economic occupancy. Open for a month or two.
If one extrapolated out the income, at their asking rates and at 85% occupancy, it was worth around $2.7 to $3 million.
It must have cost north of $4.2 million to build.
I am sure that the current ownership is having fun conversations with the bank.
As I looked throughout that particular market, I saw a few other “new” facilities in lease-up. Everybody was driving everyone else’s rates down to get customers.
If I was going to purchase this, I would make sure I get it well below replacement cost and a realistic 7% or 7.5% CAP on the first year’s stabilized income. If that seemed within the realm of what the seller would take after talking with the broker and/or the bank, then I would burn the calories to run a detailed 10-year analysis.
These types of deals will start showing up more and more.
Why?
My Rant
A number of reasons you most likely know, like increased interest rates, high construction costs, and higher CAP rates being used by buyers and lenders today.
But in my opinion, a lot of the blame goes to the funds that have entered the self-storage space.
In one statistic I heard, 60% of the funds in self-storage today are less than four years old.
They are not really in the self-storage business. These fund managers have no idea how to run a self-storage facility.
These guys are in the capital deployment business.
They can manipulate a proforma to produce any result they need to raise money, and then they deploy it. They were the ones buying existing facilities at 5% CAP rates, as well as the ones building lots of massive new projects from the ground up.
And with the amount of money they need to deploy, why not build big? Worry about overbuilding later.
As a small investor, you know how hard it is to create deals that work today.
Imagine if you had $50 million or $100 million, you had to get out the door into self-storage.
You would be a lot less interested in what the actual cash-on-cash returns were, what the real current demand in a trade area is, and much more interested in just getting the money out.
Why not? That is where, as a fund manager, you make your money. In fees. Lots of fees.
Hence, massive overbuilding in many of our markets.
That is what I saw in the distressed deal above—huge four-story buildings. I saw one where the 10 x 10’s should have been around $150 per month. They were $70 per month, with the first two months free.
How would you like to have your money in that one?
I am not saying all funds are bad. I am just saying many fund managers are incentivized to do deals because that is where they make their money. Fees and transactions.
I guess they think they will figure out the solution to the overbuilding and low-income problem down the road.
Sorry for the rant, but it bugs me.
But like all things in life, every problem creates an opportunity.
As small investors, our job is to find those opportunities and move.
I am sure I am going to see more of them.
