by John Stevens
December 7, 2010 2:27 PM
During the booming 1980s and 1990s and up until 2006, the most common path into the self storage business has been to build, however, the tides are beginning to change and from a financial standpoint, buying has become the safer bet.
There are several reasons why buying is an attractive route into the industry. It is a quick way to get into the business faster. By bypassing the development process, you can take over an existing operation fairly quickly. You will also be provided with records that show the financial track record of the business that will likely indicate the future success of the facility. Also, financing an existing company with a proven track record of net operating income is much easier than construction financing which is highly speculative.
During the era of excess, also known as the 1980s, housing growth was high, people were embracing consumerism and as a result storage space was in high demand. And when demand goes up, so does supply. Self storage facilities began being built at a rapid pace, peaking in 2006, but then tapering off. For 2010, less that 200 storage facilities are being built as numbers continue to decline.
If you decide to buy a storage business be prudent and do your homework. You may be buying someone else’s problems that are possibly too expensive to fix. Have a licensed inspector perform an inspection of the facility and be sure to verify all income and expense reports to determine the true net operating income.
Be savvy and choose a business with an ideal location along a freeway, thoroughfare or even close to a large, dense neighborhood. Buying a storage facility in a location with a high rate of development would earn a pat on the back from any real estate agent. An added consideration to buying is the option to expand and construct additional buildings once the money flow is solid enough. It combines the benefit of owning a financially successful property with the ability to create value through development.
Buying versus building equals very little risk. The real estate market is weak so investors are looking for higher returns on their investments. Class-A properties have held their values and are trading at about 8 percent. B and C facilities are not doing as well and are trading between 9 percent and 11 percent. It is true they bring in more offers, but fewer of the offers are qualified as they often involve first time buyers who face skeptical lenders.
In recent years, all four of the publicly traded real estate investment trusts (REITs) – Public Storage Inc., Extra Space Storage Inc., Sovran Self Storage Inc., and U-Store-It Trust - halted development in recent years.
Sources Used:
Meyers, Scott. “The Self-Storage Investor’s Dilemma – To Buy or Build.” REIClub.com. 2010. http://www.reiclub.com/articles/self-storage-dilemma-buy-build
Gilliland, John. “Buying vs. Building Self Storage: A Closer Look at Why Acquisitions Are Trumping New Development.” Inside Self Storage. Dec. 7, 2010. http://www.insideselfstorage.com/articles/2010/12/buying-vs-building-self-storage.aspx