Today’s self storage investment environment can be challenging for those looking to place capital in the asset class. There’s no shortage of equity capital chasing a limited amount of assets, there are declining operating fundamentals in a lot of markets, and new supply affecting most of the country. At Crow Holdings Capital, we look to be nimble and selective in our investment approach as we put our investors’ money to work.
To date, we’ve only been acquirers of existing facilities on the margins. We look to achieve value-add returns in major markets. Acquiring existing facilities to meet those objectives has proven to be a difficult task… at least on paper.
Competition for good real estate in major markets is pretty fierce across the real estate universe and self storage is no different. Desirable assets are bid up to the point where it usually hasn’t made sense for us to buy with our current strategy.
Where we have seen some opportunity to acquire is in the markets where supply hit first and has now subsided and quality assets can be purchased around replacement cost. These assets still have some sort of value-add component, whether that’s replacing an operator, expanding, or leasing up vacant space.
Cap rates remain very low for stabilized assets in good markets and I don’t see that changing anytime soon with the amount of capital vying for this product.
Development has been our bread and butter in self storage. We have always been in the development business, both as joint venture capital providers and developers. We are really comfortable with that strategy. We’ve found that development provides the best risk-adjusted returns in the markets that we want to be in.
Today, we’re focusing more on the coasts in markets that provide higher barriers to entry for new supply. A lot of markets have been hammered by new supply and we’re trying to veer away from those locations.
I do believe the new supply pipeline is slowing down in a lot of markets, however. The amount of new development deals we’ve evaluated in the last 12 months in Texas, the Carolinas, or Denver for instance has virtually been zero. As much as we love development, this strategy is also becoming increasingly more difficult.
Operating fundamentals are declining in a lot of markets, land prices are elevated, construction costs are increasing, and new development is permeating the marketplace leading to lower development yields. We are definitely pursuing these deals with added caution considering the aforementioned factors.
The financing market has been fairly robust for self storage development and acquisitions for the right projects and sponsors. We’ve been really active borrowers of construction loans and term loans with nearly all of our loans being provided by our relationship banks. Since our strategy is shorter term in nature and calls for more flexibility, we have not been active in the CMBS or life company market. We’ve seen Libor based spreads in the high 200 bps to low 300 bps range and leverage amounts in the 60-65% range for non-recourse loans.
I think that there are still good deals out there to invest in, but it’s very competitive and leveraging your network in times like this becomes increasingly important. This is such a relationship-driven business and I believe that being good partners, fiduciaries, sellers, and friendly competitors leads to good opportunities in any market environment. A tremendous amount of our success can be attributed to all the great people we work with across the industry.