Story originally featured on Sparefoot.com
In the self storage business, 2020 could be the year of “Let’s make a deal” when it comes to newly built facilities.
In recent months, executives at several self storage REITs have signaled that some brand-new facilities could be up for grabs at potentially lower prices as their owners recognize that hoped-for financial projections are out of reach.
Now, industry observers are echoing the REITs’ forecasting. In 2020, experts say, owners of some new facilities might seek a quick exit in the face of oversupply woes and financial underperformance. This could lead to a small-scale feeding frenzy among prospective acquirers.
A Healthy Dose of Disappointment
Ryan Clark, director of investment sales at Tampa, FL-based self storage brokerage firm SkyView Advisors, said the turnover of newly constructed facilities — at least those failing to meet their pro formas — that he’s seen in the second half of 2019 should extend into 2020. This will be especially prevalent among under-capitalized, new-to-the-industry developers, he said.
“Owners will begin to experience pressure from lenders and equity partners, which will increase sales and soften pricing for those types of assets,” Clark said.
Ben Vestal, president of the Aurora, CO-based Argus Self Storage Sales Network, agreed with Clark’s assessment.
“We will see a healthy dose of disappointment in 2020, as we go back to historical norms of three-to-five year lease-up periods and heavy lease-up discounts,” Vestal said. “This will lead many newcomers to the self-storage investment space to sell assets short, as there will be a meaningful amount of projects that will not achieve pro forma occupancy and, more importantly, rental rates.”
In The Eye of The Beholder
Whether newly built facilities that fall short of financial projections will be bargains is “in the eye of the beholder,” said Bill Bellomy, principal of Bellomy & Co., an Austin, TX-based real estate brokerage firm whose specialties include self-storage.
Bellomy said his firm recently handled a deal for a facility with a 20 percent occupancy rate after being open for 30 months. The property sold at replacement cost.
“The seller was thrilled with the price, the buyer was agnostic on the price,” Bellomy said, “and the rest of the market thought the property was worth 25 percent below the price.”
Bellomy said he’s advising clients that 2020 will present opportunities to purchase “beautiful projects” at replacement cost. However, he noted, most of these facilities won’t yet have cash flow.
Such deals are poised to contribute to what Bellomy believes will be the No. 1 theme for self storage acquisitions in 2020 — lowered pricing expectations of developers who are “marginally capitalized.”
“These developers are no longer looking for big multiples of their equity and are more concerned with just getting back their equity,” Bellomy said. “The silver lining in all this is there is still no shortage of equity looking to acquire facilities.”
Caution Ahead: Overbuilt Markets
From a broader perspective, Vestal said he expects the acquisition market in 2020 to be similar to the market in 2019, although he and others anticipate pricing will soften in oversupplied metro areas such as Houston, TX, and Miami, FL. In fact, Vestal urged caution about buying properties in metro areas that have seen at least a 10 percent uptick in supply in the past few years or where a new-supply increase of 10 percent or more is on the horizon.
According to Andrew Rybckynski, managing consultant at CoStar Group, a provider of commercial real estate research and analytics, 2019 surpassed 2018 for self storage acquisition volume in the U.S. Based on data collected through early December, sales volume stood at $7.54 billion in 2019, compared with $7.52 billion for all of 2018. An “exceptional” fourth quarter for self-storage sales gave a big boost to the 2019 total, Rybckynski says.
“The acquisition market is still very strong,” Vestal said, “but buyers and lenders are showing signs of discipline in overbuilt markets and with new construction.”
In light of the oversupply crunch, Rick Beal, co-founder of Atomic Storage Group, a self storage management and consulting firm based in Port St. Lucie, FL, said he welcomes efforts by city officials around the U.S. to curtail self-storage construction.
“Honestly, we have seen rates soften, we are seeing overbuilding and we have seen so much ‘dumb money’ being spent that it’s unfortunate that city councils are saving us from ourselves,” Beal said. “The fact of the matter is, our own worst enemy is ourselves. I’m glad cities are stepping in. I, for one, do not want to be the next mattress business, where there is one on every corner and they all have the arm-waving inflatable guys begging for business.”