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Is this a real question...Interest Expense!!!
Other than the obvious. Looking more from a fundamental standpoint
I don't work in this field, but I looked at self-storage as a potential investment. Some sources of mine told me that occupancy has been lower than during the pandemic, although I don't exactly know by how much.
When everyone was laid off/moved out of large homes/got divorced/.. - many self storage units quickly filled up. That situation has changed a lot in many regions.
You're correct, stabilized occupancy was pushing 94-95% at peak in mid-2021, now it's more like 90%. Also slower lease-up periods and slightly higher discounts.
Regarding rents, they haven't really come down much, but rent growth has certainly slowed. You might've been underwriting as high as 5% per year a year ago, now expectations should be more like 2-3%. That's my opinion, at least.
How are you determining rents haven't come down much? We've seen asking rent declines in excess of 30% from the beginning of the year in more secondary tertiary markets.
Building on that, it's a very difficult sector to underwrite right now. COVID blew up asking rents, compressed cap rates, and shortened lease ups. Now that the housing market has slowed down and WFH / migration patterns have normalized, rents and occupancy have fallen steeply from the beginning of the year and lease ups are taking longer. Even during the summer which is typically growth season for asking rates. Consensus seems to be rates have stabilized and will hold until Spring after which they resume growth, but personally wouldn't feel comfortable underwriting that. Think they have continued room to fall in most markets.
There are also complexities around web rate vs. store rate, concessions during lease up, and physical vs. economic occupancy which I still don't understand fully tbh. Some of the way operators underwrite is hilarious though, their in-place rent can be 30% below "street rate" and they assume the delta will burn off in 1 year even if a facility has been opened for a 3 years and the majority of leases have been signed in the last 3-6 months.
Clarification: achieved rents haven't come down much yet. There will be a lag between asking rents and achieved at the facilities. I've also seen REITs start to get people in the door with STEEP discounts then hike aggressively, not sure if that's a good strategy or not, but it could explain why asking rents have dipped so aggressively. We will see what the long term affects of this are.
Many operators have in place rates above street rates. Also not crazy to burn off below market in place rates of 30% in one year.
Self storage is a business if you have 400 units and 80% occupancy with 30% below market rent on in place rates. If you assume occupancy is steady through year end and you lose 50% of your tenants due to churn - without raising rents you’re now 15% below market (based on in place rates). Giving the remaining tenants a 30% rate increase isn’t crazy. You can do 2 increases to get those tenants there.
Also - what you see today is street rates may be $1 PSF but in place rates may be $1.3 PSF. Bring tenants in at $1 and in 4 months move them up to $1.3. Market is at $1.3, it just isn’t advertised.
If you lease 1,000 SF at $1 PSF, you make $1,000. In 4 months you raise those units to $1.3 PSF. So now you’re making $1,300. But let’s say this rent increase means you lose 20% of the tenants. So now you have 800 SF leased at $1.3. That’s $1,040 in revenue. You’re making more money. This is how storage is operating today and likely will operate in the future. The market rent has never been and will never be the street rate. The street rate brings you in the door. It’s a commodity asset. You compete on price and location. The market rate is generally above this and it takes market data to figure out where that rate really stands.
This, starting at the beginning of the year we stopped underwriting any rent growth for Year 1 and 2-3% annual thereafter (depending on the market). We are regional players, but have observed that gateway markets (Bay Area, LA, etc) have been relatively flat and have held up significantly better rates-wise in our portfolio than secondary (Phoenix, Las Vegas, Boise) and tertiary markets (which have seen big declines in asking rents). As is with all real estate, a “flat” market with some new supply can turn into a declining market very easily these days. These secondary and tertiary markets are much more sensitive to new supply as compared to multifamily supply. Just as a comment on the above, in competitive markets, you will have no idea about what the REITs or other sophisticated operators are achieving rates-wise based on “street rates” that you can Google or track with the data aggregators. ECRIs and revenue management is as dynamic as airline prices these days and so you have to understand in-place achieved rents to make an adequate underwriting assessment. But concur that stabilized occupancies in gateways are now in the lower 90%’s and cap rates for the best product has widened anywhere from 100-125bps+ from recent deals go under contract that I’ve seen. That being said, institutions are still allocating in a big way and being aggressive on stabilized yield assumptions. I am seeing some very respected institutions close deals all-cash in the past few weeks, albeit at a much slower pace than 2021 and early 2022.
What data aggregators does your firm use to figure out in place rates at competing facilities? Or are you relying on relationships at the REITs to tell you what is happening in their portfolio?
Closing on a self-storage cash-out refinance that is pre-stabilized (6-12 months away) with a 5.85% fixed rate, non-recourse, no prepay penalty and no depository relationship. Granted, the asset is Class A and above 90% occupancy at this point.
Is that a Credit Union? Can't imagine LifeCos offering flex prepay like that.
The prepay at my Lifeco is fu*ked! Haha.
I’ve just recently started digging into the space, how do you guys think about ECRIs assuming you have rates already at “market”?
Only done one self storage deal so take this for what it’s worth. We had a Class B grocer vacate and had difficulty leasing the space so converted it to self storage. Slightly differ model as the project is incorporated into a larger shopping center vs stand alone. 100k sf - roughly 35k floor plate, 3 floors.
Correlation to home prices to absorption. Less people moving = slower absorption. We underwrite no growth Years 1-2, 2% thereafter.
I don’t know which state you are in but we’ve done solar on rooftops to minimize utility expenses - plus we get the tax credits.
Smaller deals so equity/debt check is smaller. Still seeing competitive bids from community banks.
What do you guys do for determining competitor occupancy rates? I mean other than speaking with an appraiser or broker. From what I can tell stortrack and Radius+ don't have occupancy rates for properties. CoStar or Yardi? If you call facilities, are managers typically willing to share that info? Any insight would be greatly appreciated!
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