Guest Post: This Week in Storage

I am working on a couple deals, which should close next month, with an esteemed industry gentleman who has seen (and continues to see) a lot more storage deals than I, and has DONE more storage deals than I, …and thus knows more about what’s going on than I do. Until now, I’ve tried to avoid vague/high-level industry discussion in this newsletter, but I pushed him on being more specific in the below… and he can’t, and he will remain anon, so I’ll take what I can get:

“This week in storage, I learned that the asset class is still performing well based on both data and anecdotes, though not all deals are thriving.

CredIQ’s list of 890 delinquent properties shows only two self-storage properties—just 0.02%—while other asset classes face distress rates nearing 10%.

Sellers with stabilized properties can still secure favorable valuations; those who have weathered the rate and leasing storm are holding strong.

Now for the underbelly of this cycle.  Three different types of distress:

1. Sellers needing to sell for financial reasons unrelated to their storage deal, often due to being globally overlevered.

2. Sellers who are out of operating reserves and need to sell.  These are the most motivated.

3. Assets bought with floating rate debt or planned for a quick flip, with currently angsty investors.  This type is less motivated but is still eventually screwed at the end of their loan.

Almost none of this distress will appear in official reports.  But therein lies the opportunity before us.  This week, I’ve seen all all these types of distress and think I will continue to until lenders loosen up.

To highlight real-world examples without revealing too much:

• We bought four properties this year where sellers miscalculated their global finances and had pressure to sell.  But the properties themselves are leasing at 2x the average rate.

• We've underwritten deals where delays and overruns in construction, combined with interest rate hikes, forced sellers into capital calls.

• We’re looking at several deals, some managed by national operators, reaching loan maturity without having stabilized, leading to sellers needing to bring cash to closing [to pay off the loan].

The overall gist is, storage is doing fine if you can stabilize. The distress isn’t always visible in data but can be found if you know where to look.

Other takeaways this week:

• Storage sales volume is down 80-90% YoY. One buyer consistently paying the highest prices by a country mile.

• You need to be able to ballpark your own stabilized yield on cost. Brokers seem unable to do this.

• Development costs are drifting down, things are slow. Be patient, give thorough feedback, be gracious for the opportunity, and there’s plenty to do if you’re looking in the right places.”