All Forum Posts by: Kris Benson

@Jeremy Diviney  I love where your head is at.  Over leveraged assets is what crushed so many people in the last correction.  

We are syndicating deals in self-storage not multifamily but we typically shoot for a 70 % LTV in our value add projects. I can say that the S.S. market is a bit different than M.F. but I think that gives us enough cushion for the next correction if any of our debt comes due.

Interestingly according to according to the National Association of REIT (NAREIT) the self-storage asset class also outperformed other sectors in the most recent recession.

From 2007-2009 the self-storage sector produced an average of -3.80%. For comparison, apartments were down -6.7%, retail down -12.3% and for a baseline the S&P 500 was down over 22%.

When the economy is good, and disposable income is on the rise, people buy more “stuff” and need a place to store it. In the midst of the recession, when homeowners were losing their homes to foreclosure or downsizing to apartments, they also needed a place to put their stuff. Where do they go?  Self-storage units!   At the heart of this issue is the fact that Americans have a culture of buying too many things and we can’t seem to get rid of most of it. The demand curve for self-storage seems to be inelastic which helps pull the sector through major downturns. Estimates are that one-third of storage space is filled with items that have been there for over three years.

I think LTV should be a part of your downside protection but I think the type of asset class also has a lot to do with it!

I might be crashing the party but we have experience syndicating self storage deals for our investor partners.  Reliant has taken 18 projects from acquisition to sale with our investment partners.  Would love to spread the gospel on the opportunities that exist in SS!

@Anthony Dooley I think we will have to agree to disagree on this one!

@Ali Hashemi

1) I would agree that the critical component of successful management in SS is grassroots marketing. Not just SEO, Google Ads, etc but getting your site managers out into the community meeting apartment leasing agents, moving companies, Chambers, etc. That has helped us drive NOI

2)Not sure what you mean here?  Isn't that true of any real estate asset class?  If we have apartments in a bad location they probably won't do well either?  I agree that location and supply and demand in the market is a critical component to understand just like multifamily.

3)This is completely based on what your goals are.  Development has a different risk profile than a value add deal for sure.  We typically are closing 8-10 value add deals for each 1 development deal.  You need to have an appetite for that risk during the development stage of your project.

4) Not necessarily true in our experience.  As discussed in my original post 80% of the SS market is fragmented so there are a bunch of SS facilities that are still run by Mom and Pop operators who are not raising rents, charging late fees, keeping up with comps, etc.  Just like any other asset class you need to have the relationships in the market to find them.

For me the selling point for SS versus MF right now is the deal flow is still very very strong versus my experience in large commercial multifamily. I believe there is a large upside in SS as the REIT's in multifamily begin to search for their returns in other asset classes. Just my opinion but love everyone's feedback.

@Anthony Dooley that is an interesting point.  Why you think self storage not real estate?

I guess it depends on how you define real estate investing

Real estate investing involves "the purchase, ownership, management, rental and/or sale of real estate for profit."Improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investing called real estate development.

I think we hit all of those pillars with self storage.  Curious for your feedback.

Kris

@Nathan Gesner and @Jay Hinrichs I agree that you have to be cautious as to where you are buying as the REIT and other regional players have definitely bumped up the supply in the primary markets. We have had success in the secondary and tertiary markets that the institutional money has not made a play into. I am not sure this is any different than apartments. The primary markets of Atlanta, Dallas, Austin, Denver etc have also delivered a ton of supply in the last 3 years.

In regards to it being a business I think you are right you need to have the right operator managing the property just like commercial multifamily.  The NAREIT data would suggest that in the economic downturn storage was affected much less than apartments and residential sectors.  

The first hurdle in any of our underwriting is to look at the supply/demand equilibrium.  @Mark Byrge is right we typically use 7 sq/ft per person and look at the 1, 3, and 5 mile radius.  For example if there are 100,000 people in a 3 mile radius then there should be 700,000 of net rentable square feet available.  That number of 7 sq/ft is not absolute based on the area but not a bad place to start.

@John Lenhart  Thanks for the response and I take absolutely no offense!  I guess my point is that I hope we can continue the growth on the topic.  At this point in the cycle I think SS offers an incredible opportunity for all types of investors.  Please let me know how I can engage the community already active on BP....

William,  

I think the first thing you should do is review the market supply and demand information.  I would want to look at the population in a 1, 3, and 5 mile radius from your project site.  Our underwriting model typically references the demand equilibrium at 7 square feet per person.  So if there are 100,000 people living in a 5 mile radius of your site the self storage demand should be about 700,000 net rentable square feet.  Then look at how much square footage the comps in that same area have available and it should give you a good starting point on if the project is in a good market.

Typically I have seen the 1 mile radius is usually oversupplied and the 3 and 5 miles radius should be fairly under supplied.  This would indicate your project would have sufficient demand to keep it full.  In my opinion that is a good place to start your underwriting and due diligence.

I would really dig into the market first and if you are comfortable then begin your due diligence on underwriting the project itself.  

What are the returns you are targeting?

Just a quick disclaimer.  This is a really long post.  Also I am also now employed by a self storage operator so my opinion is probably is not objective.

I was a professional sale person who "retired" on 3/31/2018 to launch the investment arm of self storage business due to my belief in the fundamentals of this asset class.  I have invested my own capital in multifamily and I have successfully syndicated multifamily deals over the past 8 years.  That being said, I don't think we as investors as giving self storage its' due....

We have all seen the cap rates in commercial multifamily compress and as a syndicator it has been very challenging to find deals even with operators who have significant experience ($1Billion+ AUM) and leverage in the marketplace.  I am not saying they don't exist but certainly the environment has changed over the past 2 years.  

As I started to explore other asset classes to find returns for myself and my investors I came across self storage.   As savvy as the BP community is, nobody is talking about this asset class!  Here are the 4 reasons I think we should be:

1. Asset Class Returns:

According to the National Association of REIT (Real Estate Investment Trusts) the Self-Storage sector produced an average of 17.43% annual return from 1994-2017. For comparison here are the returns from other REIT sectors over the same time period. Self Storage outperforms apartments by 4+%

For illustration, let’s assume you invested $100,000 in each one of the REITS above in 1994. You also reinvested your annual returns back into the fund at the end of each year, creating a compounded return. What would that investment look like 23 Years later?

2. Downside Protection:

According to the NAREIT the self-storage asset class also outperformed other sectors in the most recent recession. From 2007-2009 the self-storage sector produced an average of -3.80%. For comparison, here are the returns from the other REIT sectors over that same time period:

Why was self-storage able to outperform almost every REIT sector during the most recent recession? And why is this sector somewhat insulated to the impact the recession had on other market sectors?

When the economy is good, and disposable income is on the rise, people buy more “stuff” and need a place to store it. In the midst of the recession, when homeowners were losing their homes to foreclosure or downsizing to apartments, they also needed a place to put their stuff. Where do they go? Self-storage units! At the heart of this issue is the fact that Americans have a culture of buying too many things and we can’t seem to get rid of most of it. The demand curve for self-storage seems to be inelastic which helps pull the sector through major downturns. Estimates are that one-third of storage space is filled with items that have been there for over three years.

3.Rent Growth and Positive Net Operating Income

In-place self-storage tenants are generally not price sensitive, as the self-storage rental fee is normally a small portion of a tenant’s monthly disposable income. This allows operators to raise rents as the market demand grows without an impact on occupancy. For example if you are paying $100 a month for your 10x10 storage unit and the rent goes up 6 % to $106 a month most tenants are not price sensitive enough to rent a moving truck and spend a Saturday moving to another storage facility.

In addition, there is minimal communication between different tenants at a given facility, which allows for the operator to selectively adjust rental rates for individual tenants. 

What does this rent growth allow for? An increase in net operating income drives increased value of the property which drives returns for us as the investor. 

4.Fragmented Market

Nearly 80% of self-storage properties remain in the hands of small, independent investors. The sector’s solid past performance has begun to capture the attention of large institutional investors. Larger properties in particular are increasingly the subject of interest from institutional buyers, including the larger self-storage companies that run themselves as real estate investment trusts (REITs). The top 6 public companies control approximately 18% of all the facilities with the remaining approximately 82% of the facilities controlled by independent owners. This fragmentation should provide for the opportunity for well capitalized and sophisticated operators to selectively target individual assets and portfolios at attractive cap rates. Consolidation will allow some of these operators to amass attractive portfolios of assets and emerge as large industry players. Once stabilized these portfolios become attractive assets for a REIT to purchase and create an attractive exit for investors.  Sound familiar?  This was where multifamily was in 2011!!

It's my mission to bring the value of self storage to the BP community!  Why are we not talking about this more?  There isn't even a category in the forums on it!  No fear BP community, I am going to bring self storage data to you!  Would love feedback from the community on the post!

Kris

William,

I have some insight into the self storage industry.  I need some more information from you when you say can we pass along any advice.  What are your goals with the investment, is it a buy and hold strategy, value add, expansion ?  What are the returns you are seeking with this investment?

Self storage is an incredible industry and in my opinion the returns seem to be favorable to multifamily at this point in the cycle.  Feel free to reach out to me I would be happy to help in whatever way I can, I just need a bit more information.

Kris

Khalil,

Keep in mind that in a syndication of any deal the PPM and LP Agreement are the documents that govern the relationship between the investors and the sponsor.  Just like you are completing your due diligence on the property you wish to syndicate don't overlook the due diligence on your real estate attorney.  They can be the difference between success and massive failure/litigation. 

So many of us who have found success in real estate can point to a great team around us who has provided guidance and wisdom and I count my attorney as part of that team.  Not sure where you are looking to syndicate but if its in NY message me and I would be happy to be able to provide the referral to my attorney.

Also check out the following link 

https://bootstraplegal.com/realestate/

I have never worked with them but the CEO is speaking The Best Ever Real Estate Conference next week in Denver, CO.  Looks like a really innovative way to approach legal services. 

Hope that helps.

Kris