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Short answer: Mark doesn’t object to all funds, but believes many contributed to overbuilding. Funds that raise large sums must deploy them, and some managers earn much of their pay from acquisition or development fees up front, which can favor doing big deals over generating steady returns for investors.
The incentive problem Mark describes #
- After the Great Recession showed how well storage held up, money poured into storage funds.
- Good existing deals are hard to find, so funds needing to place $30–100 million turned to building, often very large projects, because one big project deploys more capital than several small expansions.
- Some managers are paid mainly through fees for acquiring or completing projects, while investors benefit only later from stabilized cash flow.
- A pro forma can be made to look attractive with a lower future cap rate, rent growth above today’s market or faster lease-up.
Mark chose not to run a fund himself so each deal would have to stand on its own.
If you’re considering investing in a fund #
- Check the cap rate used to project future value; much of the projected return sits there.
- Learn current rents in the market and the specific trade area yourself, and look at existing supply.
- Don’t rely on a track record or deal count alone. Consider paying an independent professional to review the offering.
This is Mark’s opinion and general education, not investment advice. Mark has invested in funds himself.
Related answers #
- Is self-storage oversupplied, and where is the opportunity for smaller investors?
- What is a cap rate, and why is it so often misunderstood in self-storage?
- Why do fair, transparent rate increases matter in self-storage?
Source: Mark’s post Why I am Not A Fan Of Storage Funds
