Real Estate is Dead. Long Live Real Estate.
The best time to invest in real estate was 15 years ago. The second best time is now.
Shortly after leaving Google in 2007, I found myself looking for a safe, income generating investment that could also appreciate and help build wealth over time. Fortunately, investing passively in multifamily real estate with a then up-and-coming new real estate investment firm was an ideal solution. A few years after my initial multifamily investment, I partnered with the firm and started sharing their offerings with my network. The returns have exceeded our expectations. Over the last 16 years we acquired a total of 49 properties and have exited 28 of these. Investors’ average return was ~2.1X in 4 years; with a 26% IRR.
Last year the good times came to a stop — or at the least to an abrupt pause. The sharp rise in interest rates have had a chilling effect on the multifamly market. Sellers still want the high prices they saw in 2021 while buyers can’t make the math work given the high cost of debt in 2023.
Higher rates and the lingering after-effects of a post-Covid world are having an even greater negative impact on office and retail real estate leading many to question whether real estate as an asset class will ever be a strong investment — or at least anytime soon.
The good news is that if you go beyond the click-bait headlines and macro generalizations there are indeed promising opportunities in real estate. Self storage is particularly interesting for investors.
What Makes Self Storage Attractive?
While interest rates are certainly to blame for halting the multifamily market, there is another culprit that has been steadily chipping away at the opportunity in this space: the dominance of professional and institutional investors. Many years ago, we were able to acquire multifamily properties often off-market from single entity owners (i.e. an individual or family that owned a single apartment community). These owners often mismanaged properties and were prone to make selling decisions based on life-events — like the passing of the family patriarch who may have bought the property decades earlier. These unprofessional “mom & pop” sellers represented excellent buying opportunities as an acquirer could increase profits via better management and by buying the property at an attractive price. There’s an old adage in real estate that you make your money on the buy. Over the last 15 years, it’s become tougher and tougher to find a great buy. The big returns in multifamily have attracted lots of new market entrants — “smart money”. The mom & pop’s have been largely replaced by professional owners — both large and small from huge Wall Street players like Blackstone to small-medium sized firms like ours.
This is not the case in self storage. There are indeed some big players that have been investing heavily in self storage — in fact there are four large publicly traded self storage REITS (real estate investment trusts). Yet self storage space is huge. There are over 53,000 self storage facilities in the U.S. — that’s more than all the McDonald’s, Starbucks, Dunkins and Pizza Huts — combined. And 60%+ are still owned as a single entity — mom & pop! And, yes, a lot of these assets are mismanaged. In fact, an analysis conducted by an innovative self storage fund manager found that in any given submarket, the bottom quartile of storage operators were charging rents that were almost 50% less than the top quartile rents. Half the price for essentially the same product.
But improper pricing is only half the problem facing most mom & pop owned businesses. The other big issue many of these operators face is a lack in the ability to utilize current technology. The issue manifests itself in a myriad of ways, starting with simple things like an up-to-date website where prospective renters can quickly check availability, see prices, and then rent a unit online. More advanced solutions like automating access to the units are well beyond mom&pops’ reach.
So there lies the opportunity. The question is how to best capitalize on it.
After two years of researching the storage market, talking with a number of operators and personally investing in this space, our investment advisory, Essentia has found an excellent owner/operator to partner with on new opportunities. There are three keys to our business model and its success.
Mom & Pop Acquisitions: utilizes their proprietary data science platform to identify mismanaged properties that are located in growing, supply constrained markets
Tech & Automation: leverage consumer-friendly tech to automate much of the leasing and management functions and reduce expenses while improving the use experience
Aggregation: after growing net income across a set of homogeneous facilities, sell these multiple stabilized properties as a portfolio, which commands a premium
If you'd like to learn more about our insights and approach to investing in self-storage opportunities, including current investment opportunities with our partner, contact us.
By,
David Scacco
This is not intended as a solicitation for funds or an investment offering. This is for information purposes only.
