Institutional Self Storage
I am currently looking at capitalizing a portfolio of newly-constructed self storage properties in the Southeast US with a major institutional sponsor. This is the first self storage deal my firm has seriously looked at, and while we trust the expertise of the sponsor, we want to be able to stress the numbers as we would any other deal.
CoStar has SS data but it's pretty bad. Yardi has SS rental rate info that's actually quite accurate, which has been helpful, but that's about it. Any insight on where to look for cap rate data, rent growth data, and expense data? What's market for management? Sponsor is modeling 6%, which seems high compared to other asset classes, but again, I don't know what's considered market for self storage.
These are A assets located in Atlanta, Charlotte, and Tampa.
REITs are huge players in the self-storage industry. If you can get a hold of a Greenstreet report on self-storage sector it could be pretty helpful.
Was going to suggest this - maybe even supplemental/investor information from some of the big SS REITs?
Good call on Greenstreet. This sponsor is indeed a big SS REIT.
I would recommend reaching out to Joe Samoza at JLL in California or anyone at Skyview Advisors. They are some of the best self storage investment brokers in the business right now. They should be able to provide you a ton of information on what is market for management fees, rent assumptions, etc.
Will you be changing the branding of these facilities? Simply calling the current management team will go a long way towards answering your questions. Assuming the property management team is from one of the major players (Public Storage, Extra Space, Cube Smart, etc.) they should be able to provide you with tons of useful data points.
Thanks pickle, I'll reach out to Joe and Skyview. These properties are a portfolio of newly-developed and soon-to-be-developed properties under management from one of the major players. We always like talking to third parties to cut out some of the noise and salesmanship that goes into these types of deals. Appreciate your suggestions.
Is Joe Samoza still at JLL? Can't seem to find him online
It's Brian Somoza not Joe. Got my names mixed up in the original post. He still works there
6% management fee is pretty standard for a name brand (REIT) operator (Cube, ESS, Public). I wouldn't pay that much to a local operator. The 6% is worth it for a national operator due to the economies of scale they provide. Cube for instance has PHD quants that run the daily pricing algorithms. You're not getting that from a local mom & pop operator. The margins on nationally operated deals can be as high as 80% too, which you're not getting with a local operator.
Thanks broseph. Sponsor is one of the REITs you mentioned, so 6% is fine.
Ha, LRO has the same thing for pricing apartments, but we found that our on-site people can do a better job than pricing algorithms. Nuance is something really difficult for AI at this juncture--it's what human beings have evolved for millions of years.
But self storage is a quite a unique product type in the sense that the major players cannot even be called real estate guys, they are SEO experts. Business is won by predominantly attracting internet traffic and price optimization.
I echo what Brody said above, storage units are not apartments - do you really care what box you put your stuff into as long as its close, clean and secure? Choosing an apartment is definitely more nuanced but when it comes to storage you're going to choose based on location and price Don't even try to tell me you would rent at Cube over ESS because you like red better. All other things equal, you're going to rent at the place that gives you a $10-20 discount so algorithms and SEO are critical in this business.
I'll offer a few notes...
You are correct that Yardi is the best source for data in the SS space. However...you have to make calls to SS in the local market to properly conduct your due diligence. Rates can vary from quarter to quarter and month to month. In addition...new sites are popping up everywhere and those under construction often will not show up on Yardi. Therefore...it's imperative to call the local jurisdictions to inquire about new sites under review or in the development process.
Specifically, the three markets you mention were three of the "hottest" places for new SS starts a year ago. But apparently every developer obtained that memo since those markets are on the verge of being overbuilt with new stock showing up seemingly every month.
Most of the REITs are offering third party SS management services. This is a new-ish development in the space and should help drive management fees down. The management fees certainly vary between traditional one-story SS assets and the newer urban-style vertical assets, which are more driven by technology.
Final thought...if the assets aren't fully stabilized yet...take a close look at taxes (which might not have been fully appraised yet by the local jurisdiction), ancillary revenue sources, and expense line item for utilities. The income from ancillary sources can be strong with a good operations and management plan. However...it's often either understated or overstated. Keep in mind in NC properties are appraised by local jurisdictions just once every seven years (I'm mostly certain this is true). Also...if you don't have a full year of historical data for a SS asset...take a real close look at the annual utility allowance. This can make a big impact on the operating expense budget.
Oh...one more thing...if an asset isn't stabilized yet...throw out the developer's pro-forma and do your own.
costar has absolute shit on SS
I lile REIS’s data for rents, but sales info isn’t that great in my market.
larrison34's comments are pretty spot-on. You are going to have to pay 6% of net effective income as a management fee, though, with potentially additional income to the management company out of tenant insurance sales. For more general market data, you could look at Union Realtime Radius (haven't seen that mentioned on this thread so far.) I would also recommend the Self Storage Association's Self Storage Demand Study and the Mini-Storage Messenger's Self-Storage Almanac. Both are dense reading, but provide extensive researched information on markets. Reaching out to brokers for cap rates is not a bad idea, but I would also reach out to appraisers who take a lot of self storage assignments. Ultimately, you do have to do local market due diligence, though, because the type of self storage you are describing is likely going to have a 3 mile market radius.
I do self storage consulting across the Mid-Atlantic and Southeast (have done feasibility studies in the Atlanta market.) If you have any more questions, feel free to PM me and we can jump on a call to discuss further.
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