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  • Writer's pictureAndy Bratt

Investors Still Find Self Storage an Attractive Option. But the Math on New Deals Has Changed.

In a market in which very large deal announcements have been few and far in between, the self-storage sector took the center stage recently, when publicly-traded REIT Public Storage announced it will acquire Simply Self Storage from Blackstone Real Estate Income Trust Inc. (BREIT) for a record $2.2 billion. The Simply Self Storage portfolio includes 127 properties totaling 9 million sq. ft. and located across 18 states. A significant portion of the portfolio—65%—is located in the Sunbelt region, in markets where population growth has been approximately double the national average in recent years, according to Public Storage’s official acquisition announcement. The company plans to integrate an additional 25 properties managed by third parties into the Simply Self Storage portfolio to deepen its presence in those markets.

The same day as it made the acquisition announcement, the REIT announced a public offering of $2.2 billion in senior notes to finance the deal. The notes were to be issued in four tranches and feature an initial weighted average interest rate of 5.3%.

In a presentation detailing the Simply Self Storage acquisition on its website, Public Storage noted that it anticipates the new portfolio to generate a nominal yield of 6.25% to 6.75% in three years, once it is fully stabilized (the portfolio currently features 121 properties that are 92% occupied and six properties that are 75% occupied). The yield is expected to be accretive to the REIT’s 2024 core FFO per share, reaching 1% through stabilization. The transaction is expected to close in the third quarter of 2023.

BREIT declined to comment on the transaction. Public Storage could not be reached for comment.

In its earnings report for the second quarter, Public Storage reported that it same-store NOI rose by 6.2% compared to the same period a year ago and its core FFO per diluted share rose by 7.3% to $4.28. Aside from the Simply Self Storage acquisition, the company bought 11 facilities totaling 900,000 rentable sq. ft. for $144 million during the quarter and was under contract to acquire another 11 facilities totaling 800,000 sq. ft. for $118.2 million.

During the company’s earnings call with analysts on Aug. 3, Joseph Russell, Public Storage president and CEO, noted that the company has been getting calls about off-market opportunities for additional acquisitions, especially given that the REIT’s strong balance sheet and low cost of capital gives potential sellers confidence in its ability to close transactions and do so on schedule. “Whether it’s a one-off deal or a much smaller portfolio, that continues to be good bread-and-butter growth and acquisition opportunity for us, and the team continues to be busy,” Russell said, adding that the third quarter tends to be the most active for acquisitions.

Although mergers and portfolio acquisitions in the self-storage sector have cooled since their peak in the fourth quarter of 2021, self storage continues to be popular with a lot of investors, according to Halley Crimmins, vice president and real estate research manager with real estate data firm MSCI Real Assets. Some of those investors “will use this type of transaction to achieve scale in a sector and deploy their capital quickly just to achieve that scale, especially for these smaller assets that are usually spread across a diverse set of owners and across the nation as well.”

MSCI Real Assets only began tracking self-storage sales comprehensively in 2017, but Crimmins noted the sector was influenced by the “very similar demographic forces that you would see with multifamily.” However, in the first half of 2023, sales volume came back to roughly the level seen before the pandemic, with approximately $2.8 billion in self-storage sales vs. $14 billion in 2021. In the second quarter of the year, self-storage sales volume totaled $1.3 billion, according to MSCI Real Assets data—a 70% decline compared to the same period the year before.

During a conference call discussing second quarter earnings, Chris Marr, president and CEO of another publicly-traded self-storage REIT, CubeSmart, noted the company was evaluating new investment opportunities with caution. “Currently, many of the acquisition opportunities available in the market are of inferior quality and would be dilutive to our current portfolio quality,” he said. “As a result, we are being patient and disciplined, waiting to deploy capital until we are confident in the ability to realize attractive risk-adjusted returns. As buyer and seller expectations adjust, there will be attractive opportunities to deploy capital and we will be ready.”

CubeSmart reported that its same-property NOI rose by 5.0% during the second quarter of 2023 compared to the same period the year before. Its adjusted FFO per share increased 6.5% to $0.66. As of June 30, the REIT expected it would invest a total of $75.2 million in joint ventures to develop three new self-storage properties in New Jersey and New York.

Part of the recent boom in self-storage demand was related to circumstances created by the pandemic, when people had to downsize from houses to apartments and needed a place to store their things, according to Gary Bechtel, CEO of Red Oak Capital Holdings, a commercial real estate lender based in Grand Rapids, Mich. However, rental rates in self-storage have continued to stay strong to this day, he noted.

“There’s still investor demand both from an acquisition standpoint and to invest equity, either in the development of new projects or the conversion of other asset classes into self-storage,” Bechtel said.

A July report from real estate data firm Yardi Matrix noted that in June, on a trailing 12-month basis, the average national rent for 10×10 non-climate-controlled storage units declined by 1.5% year-over-year, to $129. Average rent on similarly-sized climate-controlled units declined by 2.4%, to $145. Some of those declines have been brought about by above-average new supply deliveries in certain markets, including Las Vegas, Phoenix and Philadelphia, Yardi Matrix researchers noted. Month-over-month in June national self-storage rents stayed roughly the same.

Red Oak Capital provides one- to three-year acquisition and conversion/rehabilitation loans and Bechtel said he has seen many properties, including industrial and retail facilities, being acquired and turned into either regular or climate-controlled self-storage facilities. He estimates that equity investors in self storage are likely looking for returns from the low double digits to the 20% range.

Self storage continues to be popular with investors because it tends to be a recession-proof asset and still produces cash flow, according to Tom Bretz, founder and CEO of StorSafe, a division of real estate acquisition firm Elmdale Partners, formed in Skokie, Ill. In 2010. “People like quarterly investor dividend checks,” he noted. Bretz acknowledged that like the rest of the commercial real estate universe, self storage has felt the impact of rising interest rates. “But to my mind, self storage is still one of the favored asset classes—it’s still popular because people recognize that in good times and bad, people need storage.”

According to Bretz, equity investors in self storage are looking for returns somewhere between 8% and 10% a year, “with a kicker when you sell the property.”

StorSafe currently owns 24 assets comprising 1.3 million sq. ft., mainly in the Southeast because of the pace of household formation in that region. The firm prefers investing in single-story drive-up properties in secondary markets. “Land is too expensive in, say, downtown Atlanta or downtown Tampa to do what we do, so we tend to buy in the suburbs or in the periphery of town, and we’ve definitely seen that those are very active markets and getting very strong rental rates right now.”

StorSafe’s most recent acquisition was Bonus Room Storage, situated on Smokey Park Highway in Candler, N.C. The property features 176 climate-controlled units, 141 non-climate-controlled units and 39 parking units across a 40,733-sq.-ft. portfolio that caters to RV owners, military members and commercial entities such as small businesses and logistics providers. The fund that was used to acquire the property involved a combination of sizeable family office investors from the Chicagoland area and the firm’s network of high-net-worth investors, according to Bretz. “We raised about $35 million in equity, and we put it together relatively quickly.”

Ultimately, StorSafe’s plan is to buy seven to 12 properties for the fund, and Bonus Room Storage was its fifth. The firm continues to look for properties to acquire in the Southeast and Midwest and has also recently made inroads in the Florida market by acquiring a storage facility in Palm Shores. StorSafe executives felt it was a good market for investment because it attracts a lot of retirees from the Midwest.

Gantry Inc. is an independent mortgage banking firm based in Orange County, Calif., whose principal, Andy Bratt, is also a private investor in self storage (Bratt specializes in self-storage loans at Gantry). Last year, the firm completed at least $250 million in loans on self-storage facilities, he noted. Over the past five years, the firm originated a total of approximately $1.5 billion in self-storage loans, with a lot of growth coming in the past two-three years, Bratt said. In 2023, he expects loan volumes on all asset classes to be down compared to 2022, but he remains bullish on self storage. He views it as an asset class that has matured “and there’s been a sophistication of capital that has entered the space, both on the debt and the equity side.” Even before the pandemic, self storage was already attracting a lot of attention from institutional capital. The strong performance of self-storage properties during Covid added to that trend.

Gantry’s own dealmaking in self-storage has continued apace. In May, Gantry secured $40 million in financing for the acquisition of four self-storage facilities located in Tennessee and Florida in a 1031 exchange transaction. The assets were assembled through a series of individual acquisitions each requiring its own loan. In June, the firm announced it had secured $7.7 million in permanent financing for two self-storage facilities totaling 135,000 sq. ft. of rentable space in Utah, including the 60,000 sq.-ft. Uptown Storage, owned by Storage Corner Group, in Salt Lake City, and the 75,000 sq.-ft. Central Storage and Business Park in St. George.

In Bratt’s view, there is “still a significant demand on the equity side to be placed into self-storage—it just becomes more challenging with the higher cost of capital, but there are a couple of ways to look at that.” First, rising land prices and construction costs have affected the viability of value-add opportunities; second, rising interest rates have cut into returns. Combine those factors with the competition that has been building in the self-storage sector, and it no longer looks like a relatively easy opportunity to make money it once was, Bratt noted.

Nevertheless, Bratt continues to see interest in self storage from a wide range of investors, including institutions, private equity, high-net-worth investors and syndicator models “raising money from friends, family and country club.” In his estimate, investors are looking for returns ranging from the high teens to 20s on construction projects, depending on location. In a core market like Los Angeles or Manhattan, the returns would probably be closer to mid-teens, he noted. On value-add deals in infill locations, the returns range between 12% and 15% in his estimate. Deals with opportunistic strategies can bring in returns from 12% to 18%, again depending on the market.

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