COMMERCIAL A Think Real ty Publ icat ion VOLUME 1
Commercial Real Estate Post-COVID THE THREE STAGES OF A POST-CRISIS COMEBACK
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Commercial Real Estate Post-COVID THE THREE STAGES OF A POST-CRISIS COMEBACK
by Grant Cardone
A lthough it has been over ten years since the finan - cial crisis of 2008, I still remember how this coun- try got completely rocked. I’ll never forget the fear and uncertainty I felt back then, wondering if I was going to have a business when it was all over. We made it through and from that moment on I realized I had to adapt my business structure and my revenue streams to withstand the next crisis. I just never imagined that it would be a pandemic that would have an even bigger impact on com- mercial real estate than the 2008 financial crisis. While the last crisis was all about credit and liquidity, the pandemic nearly wiped out the demand for commer- cial space because of work-from-home orders, shut- downs, quarantines, supply chain disruptions, unemploy- ment spikes, and a huge drop in consumer confidence. Thankfully, it looks like we are turning a corner, but
commercial real estate is going to have a longer recov- ery than most other sectors because of the huge hit it took. How fast commercial real estate makes its come- back will depend largely on our capability to increase the speed and efficiency of virus testing and deploying the vaccines. Then we also have to see how people handle the continued need for social distancing. Finally, we will have to determine how the stimulus package will affect the situation. Whatever happens, commercial real estate will look a lot different than it did before COVID-19. While various indus- tries, markets, and property types will come back at differ- ent speeds, the satellite services surrounding commercial real estate like property management, architecture, con- struction, and appraisal will become even more important as the industry adapts to the new reality. One sector of the
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industry that is going to have to majorly adapt is brokerage. I see the comeback happening in three stages, and the first one is happening right now. We’re already seeing increases in rent collection in industrial, office, retail, hospital - ity—and my favorite—multifamily. As anyone who knows me can guess, I’m particularly pleased about the bounce back in multifamily, which is registering rent collections at about 90 percent. The pandemic presented unique opportunities for me and my investors in the multifamily sector, with even more opportu- nities on the horizon. I’ve also got my eye on office space and industrial, which are both showing signs of promise since they can be more easily reconfigured to suit post-pan - demic needs of business owners. The second stage of the recovery will happen over the next nine to twelve months but it’s going to be a slow process as assets will most likely be reopened in phases and the possibility of additional spikes in COVID cases could disrupt that process. However, I am confident that multifamily will not only stabilize more quickly but strengthen as peo- ple will always need a place to live—just like they need food. The third stage of the recovery won’t come until much later in the distant future as we all adjust to a post-COVID world in which we are prepared for the next crisis, be it finan - cial, viral or something else. As I have said in the past, the major urban markets like New York City, Los Angeles, Chicago, Philadel- phia, Detroit, and Washington, D.C. will be hit harder. This is because employees who are allowed to work from home are flee - ing densely populated cities for the suburbs where they can have more space. As many businesses are making working from home a permanent policy, I see a continuing demand for units in multifamily properties. They offer renters an affordable residence in a clean, modern, and well-maintained environment with premium-grade, onsite amenities in proximity to schools, supermarkets, and retail centers.
10x living at grandview
Port Royale
Stella at Riverstone
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OPPORTUNISTIC INVESTORS LIKE MYSELF ARE ALREADY SEARCHING THE MARKET FOR DISTRESSED PROPERTIES WHILE THE RISK-AVERSE WILL CONTINUE TO PLAY IT SAFE AND REMAIN IN AHOLDING PATTERN. ”
—GRANT CARDONE
Opportunistic investors like myself are already searching the market for distressed properties while the risk-averse will continue to play it safe and remain in a holding pattern. Right now, a lot of investors are limited to looking at properties virtually but take it from me—real estate is a hands-on asset that needs to be seen up-close and personal. You have to see it in order to get a sense of the property’s potential along with whatever assets surround it. The current situation makes site visits, appraisals, transacting and closing a lot more complicated. This is why if you can’t go personally inspect a potential acquisition, it’s crucial to partner with an investment firm who can not only monitor the mar - ket constantly but also jump on a property as soon as it becomes interesting. It won’t be anything close to business as usual until the lockdowns end, air travel resumes like before, and people feel comfortable about traveling and interacting in person. There’s no doubt that the real estate industry will be permanently transformed after the pandemic just like it was after the Savings & Loan collapse, the tech bust, 9/11 and the Great Recession. Thankfully, every- one agrees that the worst is behind us and the econ- omy will be much stronger in about a year from now. By 2022, we will be stable and even thriving again. After all, new challenges bring new opportunities.
Grant Cardone owns and operates seven privately held companies, and a $1.8B real estate portfolio as the Founder and CEO of private equity real estate firm, Cardone Capital. Cardone is also the founder and leader of The 10X Movement and The 10X Growth Conference, which is now the largest business and entrepreneur conference in the world. Moreover, Cardone founded the Grant Cardone Foundation, a non-profit organization dedicated to mentoring underprivileged and troubled youth in character and financial literacy.
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Protecting Multifamily Investments
WHAT ARE THE BEST BASES ON WHICH TO MAKE INVESTING DECISIONS?
by Joe Fairless
I n the midst of this pandemic-in- duced economic recession, a new president was inaugurated and the balance of power in the House of Representatives and the Senate shifted. This provokes an additional degree of uncertainty. Will the new administration autho- rize additional economic stimuli? When will the eviction moratorium end? Will the economy fully recov- er once the country completely reopens? Will former President Trump’s tax cuts remain in place? Will President Biden raise taxes? These questions and many more are top of mind for multifamily inves- tors. What can you do to protect your investments? Ultimately, your decisions as to when and how to invest should not be based on who is president, who controls the House or Senate, or which part of the market cycle we are in. Investors have made money investing in multifamily under both a Democrat- and a Republican-led gov- ernment, as well as during economic expansions and recessions. If you want to set yourself up for success in 2021 and beyond, here are three sim- ple principles you must follow.
1. BUY FOR CASH FLOW There are two major pathways to make money when investing in mul- tifamily real estate: appreciation and cash flow. Market-driven appreciation is when the value of a multifamily investment “naturally” increas- es. This is commonly motivated by compressing capitalization rates or increasing rental rates due to rising demand. For example, according to Apartment List’s National Rent Report, rents were up approximately three percent nationally in 2018 and ~2.1 percent in 2019. As long as you invested in a market that experi- enced rent growth equal to or great- er than the national average, your investment appreciated in value. However, due to the COVID-19 pandemic, national rental rates decreased by 1.2 percent in 2020. In many markets, rental rates fell more than 10 percent, with San Francisco experiencing a 27 percent reduction in rents. Therefore, if you made a multifamily property investment in early 2020 and based your analysis on the assumption that rents would continue to grow “naturally,” your investment has almost certainly decreased in value.
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In other words, buying for apprecia- tion might be great during an expan- sion, but because no one can consis- tently predict if the ball will land on red or black, buying for appreciation is comparable to gambling. The ideal approach is to buy for cash flow. Cash flow is the profit generated by a multifamily invest- ment after all expenses are paid. Simply put, buying for cash flow means that the investment will gen- erate a monthly profit from day one. The success of the deal is less based on market-driven appreciation and more on how the investment is cur- rently performing. When you buy based on cash flow, fluctuations in rental rates will still impact the value of your investment. However, since the property is gen- erating a profit from the onset, you have a built-in buffer. At the mini- mum, you can cover your expenses and not be forced to sell. 2. SECURE DEBT FOR DOUBLE THE LENGTH OFYOUR BUSINESS PLAN Because the value of an invest- ment is always subject to fluctua - tions in the market, you must also secure long-term debt. Imagine your business plan is to perform upgrades on 100 percent of your units over a 24-month period with a goal of increased revenue. You secure a three-year bridge loan with the intent to refinance into a con - ventional mortgage once the reno- vations are completed. If everything goes according to plan, that’s great. Now, imagine a global pandemic breaks out during year two and you are unable to achieve your desired rent increase? Once the bridge loan’s term ends you will likely need to bring cash to the table for closing
costs. What’s worse is that you may not be able to secure a refinance at all. Now, you’re facing foreclosure. To avoid these scenarios, it is recommended to always secure debt for a term that is at least twice the length of the business plan. In other words, if you expect renovations to take 24-months, secure debt with a loan term that is at least four years long. This, like buying for cash flow, will provide an extra safety net. 3. MAINTAINADEQUATE CASH RESERVES The final principle is to create a sufficient reserve budget. Cur - rently, conventional lenders are requiring higher reserve budgets. On some loan products, this could mean upwards of 18 months of principal and interest. Keep in mind, requirements of this amount are in response to COVID-19. Even when lenders are not requir- ing large cash reserves, you must voluntarily elect to place funds in an account as a safeguard. This will pro- tect you against fluctuations in the market and cover other unexpected events over the course of the busi- ness plan’s execution. This includes an upfront fund at closing and a por- tion of the revenue each month. A cash reserve is the final safe - guard in the event of a major reces- sion and negative cash flow. It will allow you to cover the debt service and expenses and avoid a situation where you’ll be forced to sell.
THIS SYSTEMWORKS I have faithfully adhered to these tenets since I began raising capital to buy multifamily real estate in the form of apartment communities in 2015. By practicing these principles, my company was able to add just under $300M in assets in 2020, despite the pandemic. This past year has increased our portfolio to over $1B in assets under our management. Regardless of how long the pan- demic lasts or the legislation passed by the government, if you stick to these three principles—buy for cash flow, secure long-term debt, and set aside adequate cash reserves, your portfolio will not only survive, but thrive throughout your real estate investing career.
Joe Fairless is the Co-founder of Ashcroft Capital which has over $1B in assets under management. Joe created
the podcast, Best Real Estate Investing Advice Ever Show, which is the longest-running daily real estate podcast in the world and generates over 500,000 monthly downloads. He is also a proud Member of the Texas Tech Alumni Advisor Board for the College of Media and Communication, as well as being recognized as Outstanding Alumni at Texas Tech University, where he is a former Adjunct Professor. He is currently a Junior Achievement Board Member and Volunteer for the Cincinnati chapter and has been recognized by the Junior Achievement’s Free Enterprise Society. Joe volunteers at Crossroads Hospice and was recognized as Multifamily Investor of the Year by Think Realty Magazine.
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Suburbanization Unveils Growth Opportunities
HOW MULTIFAMILY INVESTORS CAN REPOSITION THEMSELVES IN 2021 AND BEYOND
by John Chang
URBAN AND SUBURBAN TRADEOFF ACCENTUATED BY THE HEALTH CRISIS The drastically different lifestyles of quarantine and the shift to remote working are having an immediate impact on renter preferences, with implications for multifamily prop- erties and investors. Living space is taking priority over location for many who are currently searching for an apartment, leading tenants to the suburbs, where unit sizes and communal areas can be larger. Additionally, entertainment, night- life and other urban amenities that typically entice renters to downtown apartments are closed or operating at limited capacity, stunting demand for nearby living options. The subur- ban momentum linked to downtown business closures will subside in the near term as progress is made on combatting the pandemic. Howev- er, a longer-term shift benefitting suburban multifamily could emerge
if more companies keep their staff remote into the future. Employees that aren’t tied to a physical office can be more flexible in their apart - ment search and may find more affordable living options in the sub- urbs that can better accommodate an at-home workspace. Apartments near urban office districts could notice a downtick in demand if a sig- nificant portion of nearby employers keep operations remote or relocate to suburban settings. Multifamily investors seeking higher initial yields may be inclined to expand their search criteria beyond the urban core, while investors thinking toward a longer-term recovery may seek urban assets with upside potential. MILLENNIAL MOVEMENT OUT OF DOWNTOWN ACCELERATED LAST YEAR Expectations for suburban house- hold growth were strong prior to the health crisis, underpinned by
population dynamics. Many of the aging millennials that helped fuel robust urban apartment absorption over the past cycle have matured into their family formation years. Those with growing families are seeking more space than the urban core can offer. This trend was boosted by the events of last year, as population density became less appealing and remote work and schooling crowd- ed living spaces. Many households in this situation became first-time homebuyers, assisted by low interest rates, pushing the homeownership up significantly in 2020. This surge in homeowner demand — combined with supply limitations imposed by higher construction costs and fewer existing homes on the mar- ket — raised sale prices and made single-family homes even less attainable. Families outside the margin of meeting the down-pay- ment requirement may opt to rent from a suburban multifamily prop-
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SUPPLY PRESSURE WEIGHS MARGINALLY ON SUBURBAN VACANCY AND RENT
erty. Apartments in these settings are generally surrounded by high- er-quality schools and have more spacious floor plans, top consider - ations of later-stage millennials with young families. A FEW LARGE MARKETS PRIMARILY RESPONSIBLE FOR ADJUSTMENT TO URBAN FUNDAMENTALS Nationwide almost 3,000 urban units returned to the market last year, though conditions from metro to metro were far from uniform. New York City was responsible for the bulk of negative absorption in the country, with a net dispensation of more than 15,500 downtown rent- als. San Francisco, Seattle-Tacoma, Boston and Chicago also returned a combined 10,000 units of urban apartments back to the market in 2020. Outside of those five major markets, demand for downtown apartments softened by a much lesser extent. The next 10 largest U.S. apartment markets by inven- tory recorded compounded positive net absorption of more than 11,000 units downtown. When rolled in with the rising availability of the larg- er metros, however, the national urban vacancy metric still jumped 250 basis points in 2020 to a more than two-decade high of 6.6 per- cent. Sluggish demand in key cities also pushed the downtown average effective rent lower by 7.2 percent last year, the steepest decline since 2009, to a six-year low of $2,400 per unit. While more near-term chal- lenges lie ahead for apartments in the inner cores of densely popu- lated cities, the long-term outlook remains promising. Many young adults still prefer the downtown lifestyle and will want to live in areas that are proximate to shops and ser- vices once they can fully reopen.
term demand drivers, like house- holds escaping from population density, and long-term momentum from suburban office absorption. In the urban cores of challenged gateway markets, buyers may realize value-add opportunities with bidding competition moderated. However, near-term hurdles in those met- ros are greater than in fast-growing Sun Belt metros, where capital is increasingly flowing into both urban and suburban properties.
Across the country nearly 160,000 suburban rentals were absorbed last year, 20 percent fewer than in 2019. Despite sturdier demand for subur- ban apartments than urban, vacancy ticked up 30 basis points national- ly to 4.3 percent and the average effective rent dipped by 0.6 per- cent to $1,479 per unit. New supply pressured fundamentals. Last year roughly 214,000 suburban rentals were finalized, up 34,000 units from 2019. The pipeline for this year is weighty as well, particularly in the suburbs of fast-growing Sunbelt markets. Dallas/Fort Worth will lead the country with more than 28,000 new suburban units this year. Hous- ton, Atlanta and Charlotte are sched- uled to add more than 10,000 sub- urban rentals each in 2021 as well. Alternatively, other metros with less competition from new supply posted notable suburban vacancy drops in 2020, including Riverside-San Ber- nardino, Sacramento, and Las Vegas. Some markets without strong in-mi- gration tailwinds are also undergoing significant internal suburbanization from existing residents. Indianap- olis and Columbus may be prime examples, with suburban vacancy in these metros contracting by at least 40 basis points while urban vacan- cy jumped by more than 250 basis points in 2020. MULTIFAMILY INVESTORS ADJUST STRATEGIES FOR 2021 Given current migration trends, first-ring suburbs with urbanlike amenities will be among the most favored locations for buyers. These inner rings benefit from both short-
John Chang serves as the National Director of Research Services for Marcus
& Millichap. He is responsible for the production of the firm’s vast array of commercial real estate research publications, tools and services. Under his leadership, Marcus & Millichap has become a leading source of market analysis, insight and forecasting, and the firm’s research is regularly quoted throughout the industry and in mainstream business media. John oversees a team of dedicated real estate research professionals who produce the firm’s more than 1,000 annual market research publications and conference presentations. These detailed reports, analyses and presentations integrate economic and financial market trends with insights on all major commercial property types including: Hotels, Industrial, Manufactured Housing, Multifamily, Office, Medical Office, Retail Multi- Tenant, Retail Single-Tenant, Self-Storage and Seniors Housing. John is a seasoned industry analyst who has been quoted in numerous publications and is an active member of the NMHC Research Foundation Advisory Committee, the ICSC North American Research Task Force and the NAIOP Research Foundation. He regularly presents at a wide range of conferences and events hosted by industry- leading organizations such as the NMHC, NAIOP, ULI, CCIM, ICSC, SSA and numerous others. John joined Marcus & Millichap in April 1997 as a Research Manager in the Seattle office. After holding executive marketing and e-business positions with premier residential real estate firms in the Pacific Northwest, he rejoined Marcus & Millichap in November 2007 as the head of its Research Services division. John was elected as Vice President in 2010, advanced to First Vice President in 2013 and promoted to Senior Vice President in 2018.
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Using Data to Drive Self-Storage Acquisitions HOW TO INCREASE THE ODDS OF A SUCCESSFUL LONG-TERM DEAL
by Tyler Burke and Scott Lewis
A s a real estate investor, incorrectly identifying a deal can potentially cause catastrophic losses, while proper identification of a deal can set you up for long-term success and wealth creation. In a competitive marketplace, real estate investors must combine a boot-on-the-ground qualitative analysis with data-driven quantita- tive research. It is the combining of these two approaches that paints the most complete picture allowing for additional insight to how a property may perform.
Gone are the days of informa- tion asymmetry where the seller always had more information than the buyer. Technology has levelled the playing field by bring vast data solutions to the public. With the tools and resources available, it would be careless to not utilize a data-driven approach throughout the evaluation process. A winning strategy can be executed in as little as three steps. The first is to analyze the available data sources including those from a third-party consultant. Next, you need to verify
the veracity of the data with a little grunt work of your own, and finally you need to validate that your busi- ness plan for the property can be accomplished based on the research by wargaming various scenarios. When an opportunity hits your desk, the first step in determining if the deal works, is to start by pulling all available datasets in the market you are looking. Data providers such as CoStar, Reonomy, and Radius allow investors the ability to quick- ly analyze a market. Investors can efficiently deduce whether a deal is
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worth pursuing based on the macro fundamentals of the market. In the self-storage industry, the primary metrics that drive decision making are 1) how much competitive supply there is in the market, and 2) what rental rates are being achieved. The objective is to identify deals where there is the ability to take advantage of less competitive supply, below market rental rates, or both. Infor- mation provided by the third-party data providers for a desktop study and internally derived metrics, should drive the decision-making process. Here, if the initial metrics meet or exceed the internally derived metrics, you should proceed forward. If not, pass on the deal. Now that you have all this data, you need to verify its veracity. While the data providers do a fantastic job aggregating great sums of data, the datasets can be incomplete and using outside information as com- plete truth is a recipe for disaster. Successful real estate investing requires operators to personal- ly verify the accuracy of the initial assumptions. Not all information can be found from a desktop study. Taking the extra step is what can uncover a great deal, and potentially stop investors from doing a detri- mental deal. It is imperative to take on a more proactive approach and immerse yourself in the respective market. Using a combination of GIS mapping software, Google, and an in-person market visit, we catalogue and record every single facility within our established subject area. This always leads to discovering more information than what was initially assumed. Your team should person- ally tour the market while verifying every facility in the area to assess the entire competitive landscape, identifying competitive property’s rental rates, and bifurcating them even further by defining charac -
teristics. Verifying the data allows investors to fully comprehend the market’s unique macro and micro fundamentals. By doing the extra research, over time you will build an internal data set to aid in your deci- sion-making process. The final step is validating the business plan can be achieved based on the data that has been researched and verifying by wargaming a couple of scenarios on how a deal could play out. No two deals are the same, so proper qualitative analysis, i.e., war- gaming is important. In the self-stor- age business, demand is everything. If a facility can’t stay occupied, the deal will be in trouble. The various data providers can provide national and even submarket level heuristics on demand usage, which is approx- imately eight sq. ft. per capita. Now that you have the national level demand, it is important to assess your market because fundamen- tals and the unique characteristics vary widely by market. Boise, ID may have a drastically higher supply of self-storage than downtown Denver, CO, but that does not mean Boise is an oversupplied or weaker market. Specific markets possess varying demands regarding customers’ stor- age needs. Instead of comparing to the national average, it is important to compare against markets that are similar in nature. Using the mar- ket data collected and by manually recalculating what the supply and demand equilibrium numbers look like, “oversupplied” markets may be appropriately supplied, or even undersupplied, when compared against similar markets. Once you have all your numbers, this is where scenario analysis and wargaming come in. You need to run your numbers a bunch of different ways and determine the outcome based not only on the data, but what you’ve qualitatively identified through
your own market research. If you were to simply take the national heuristic of what is considered equi- librium, the potential to miss out on fantastic investment opportunities is huge. By intimately understanding every market you do business in, you can see potential where others may not. Ideally you want to have a firm understanding of the market, how the subject deal compares, and compile this research into a strong business plan to best position the asset. Taking a data-driven approach to commercial real estate investing is a must. However, just looking at numbers on paper is not enough in today’s competitive environment. It is crucial to combine the data provided by third-party firms with an internal qualitative analysis. By first trusting the data available to begin the pro- cess, then personally verifying it, and finally validating the research to prop - erly execute the business plan, inves- tors can increase the odds of identify- ing a successful long-term deal.
Tyler Burke is the Senior Investment Associate at Spartan Investment Group where he focuses primarily on acquisitions and business development. He is responsible for leading the acquisition process across multiple markets. He graduated from Colorado State University with a bachelor’s degree in Economics.
Scott Lewis is the co-founder and Chief Executive Officer of Spartan Investment Group, LLC (SIG). To date SIG operates over 5500 storage units, 200 RV pads,
has completed $11M in development projects, has $115M more underway, and has raised over $42M in private equity. As the CEO, Scott is responsible for the strategic direction of the company and ensuring it aligns with SIG’s mission to Improve Lives Through Real Estate. In addition to Spartan, Scott is also in the US Army Reserves and a combat Vet. Scott graduated from Michigan State University with degrees in Chemistry and Marketing, from Catholic University with a MS in Management, and from Georgetown University with a Certificate in Project Management.
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Self-Storage Sector Holds Up SOUTHWESTERN CITIES HAVE HEALTHIEST RENT TRENDS
by Francis Chantree
T he self-storage industry has grown significantly in recent years, with developers regularly finding profitable locations for new facilities. Also, as it provides vital services, it has a reputation for riding out challeng- ing times relatively well. Add to this the comparative ease with which a self-storage business can be started, and it becomes clear why it is an enduringly popular sector with real estate investors. One important question for any entrepreneur looking to start out in self-storage is where they should focus their attention. Analysis made by STORAGECafé, using data from their sister division Yardi Matrix, indicates that many storage facility operators in the nation’s largest cities have been able to maintain profitable rental rates during the challenging year of 2020, and prior to that as well. Interestingly, however, the places that have seen their self-storage street rates increase the most are in the Southwest.
considered an essential service and so many facilities stayed open throughout 2020, swiftly introducing new health measures and contact-free operations, being of service to people experiencing the year’s challenges, and staying afloat economically. A self-storage locker can also see more everyday usage. As it is much cheaper than residential space per square foot, many people with restricted room at home use it as a smarter, more cost-effective overflow for occasionally used items. Other clients may include fans of sports that require bulky equipment and anyone who relocates tem- porarily to smaller accommodation, for example to spend winter in a warmer climate. Storage space can also be useful for business purposes, providing a flexible amount of space for raw materials, products or paperwork and requiring no commitment to a long-term lease. When circumstances drive people to self-storage, inventory can lag behind demand, creating opportuni- ties for investors. Local building regulations play a part in decision making, but developers often find profitable locations for building and they may also take on renova- tion projects with lower start-up costs. These days, new, high-rent city-center facilities and converted suburban retail spaces find their place alongside the traditional out-of-town lock-up garages. SELF-STORAGE ISAPPRECIATED AND EASIER THAN OTHER SECTORS
SELF-STORAGE FOR DOWNSIZING, FLEXIBILITYAND SMART LIVING
Self-storage is strongly linked with life events such as moving to a new home and accommodating an expanding family, so population increases in a city often spell good news for its self-storage sector. In addition, economic cir- cumstances can create a need to downsize or to free up living space if a household suddenly has to take in extra members. For these reasons, self-storage is generally
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of supply and demand in any given place, and also of the sector’s profitability and attractiveness to inves - tors there. By looking at average rates through sev- eral recent years and across the nation’s major cities, consistent trends can be observed, giving potential self-storage developers confidence and some of the vital guidance they need. ALMOSTHALFUS LARGE CITIES SEE POSITIVE 2020 SELF-STORAGE RENTTRENDS Rents for non-climate-controlled 10’x10’ units — the ‘standard’ type often used as a benchmark — over the last four years provide a good measure of consistent trends in the industry. Across all US cities with over 500,000 inhabitants, the average street rate dropped from $126.8 in 2017 to $123.7 in 2020, the annual decreases being around one percent in 2019 and 2020 and half that in 2018. The average drop across all these large cities was -2.13 percent, with 46 percent of them seeing an increase. (The averages for all U.S. cities of any size during that time were slightly lower than the figures for these large cities.) The average self-storage inventory across the nation’s large cities by the end of 2020 was 6.82 sq. ft. per capita, roughly the same as for the nation as a whole, and a figure that has gradually increased since 2017.
Self-storage can be a less stressful business than other real estate sectors. Start-up costs may well be lower, and developers often note that it is easier to operate than com- parable sectors that are more people intensive. In addi- tion, communities often appreciate self-storage as it tends to be a local industry geared to serving customers within a radius of just a few miles, and town halls often welcome its ability to repurpose vacant sites and buildings. However, even a sector like self-storage can experi- ence over-saturation, and construction of facilities has indeed slowed in some areas. And then there was the impactful year of 2020, where the sales volume of storage facilities totaled $2.3B for 32.9M sq. ft. in 521 properties, down from the 54.1M sq. ft. in 852 facilities that was sold in 2019 for almost $4B. But confidence in the market was demonstrated by the fact that the average price per square foot of $70.9 during 2020 was only slightly down on the average of $73.3 seen in 2019. SELF-STORAGE EXPERIENCES DOWNTURNS, ANDADAPTS The industry has mechanisms for dealing with down- turns, one being the temporary lowering of storage rents to maintain occupancy and a loyal customer base. The street rates advertised for units are an indication
TOP US CITIES BY STREET RATE INCREASES 2017-2020
RANK
CITY
2017
2018
2019
2020
2017-2020
20.74%
$102
$97
FRESNO, CA
$90
1
$84
15.14%
$83
$79
EL PASO, TX
$74
2
$72
13.31%
$106
$105
LAS VEGAS, NV
$99
3
$94
11.68%
$97
$96
TUCSON, AZ
$91
4
$87
8.21%
$98
$95
ALBUQUERQUE, NM
$92
5
$91
7.39%
$188
$189
SEATTLE, WA
$186
6
$175
5.97%
$112
$109
PHOENIX, AZ
$108
7
$106
4.32%
$232
$228
LOS ANGELES, CA
$225
8
$222
3.91%
$135
$129
PHILADELPHIA, PA
$129
9
$130
3.04%
$237
$240
NEW YORK, NY
$243
10
$230
-2.22%
$124
$125
NATIONAL AVERAGE
$126
$126
Note: Average rates for a 10x10 non-cl imate control led storage uni t Source: STORAGECafé analysis of Yardi Matr ix and U.S Census Bureau data.
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SOUTHWESTERN CITIES EXCEL: SELF-STORAGE OPERATORS INCREASE INCOMES Many cities in the Southwestern states have thriving economies and experience influxes of people who come either for work or for the great year-round weather. Self-storage has clearly become a vital resource for many of these people, whether they are moving to a new home, downsizing, engaging in the outdoor activities the region has to offer, or simply needing extra space for their pos- sessions. It is good value in these places when compared both to larger cities across the country and to the national average, and rents are trending upwards.
The cities with the highest street rates — San Fran- cisco, New York, and Los Angeles — all saw them gain slightly between 2017 and 2020, attaining averages of $256, $237 and $232, respectively. At the opposite end of the price spectrum, Memphis, Indianapolis, and Oklaho- ma City all witnessed slight street rate reductions during that period, ending 2020 at $79, $79 and $65, respectively. Philadelphia, Phoenix and Seattle also make the top 10 of cities with improved street rates during 2020, but it is a group of cities in the nation’s Southwest which saw the most exciting increases.
TOP US CITIES WITH HIGHEST STREET RATE INCREASES 2017-2020
$130
$125
$120
$115
$110
$105
$100
$95
$90
$85
$80
$75
$70
2017
2018
2019
2020
FRESNO, CA EL PASO, TX
LAS VEGAS, NV
TUCSON, AZ
ALBUQUERQUE, NM NATIONAL AVERAGE
Note: Average rates for a 10x10 non-cl imate control led storage uni t Source: STORAGECafé analysis of Yardi Matr ix and U.S Census Bureau data.
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1. FRESNO, CA: GROWING AND THRIVING Fresno is the economic hub of the fertile San Joa- quin Valley, and it experienced a 7.46 percent population increase from 2010 to 2019. The city’s remarkable 20.74 percent average street rate improvement, going from $84 in 2017 to $102 in 2020 for a standard unit, indicates that self-storage is a thriving part of the local economy. The city’s 8.66 square feet per capita in 2020 is somewhat higher the national average. There are around 50 stor- age facilities in and around Fresno. 2020’s market activity comprised the sales of two facilities in the city’s north- westerly districts for a total of $15.94M and a combined square footage of 164,327. 2. EL PASO, TX: SUN CITY SHINES Standard storage unit rents in this West Texas city saw a 15.14 percent rise from $72 in 2017 to $83 in 2020. The diverse economy here includes oil and gas, manufactur- ing and service industries, and although the influx of new - comers has only been moderate — 5.02 percent between 2010 and 2019 — Texas’s increasing status as a place to do all kinds of business may be having an effect in El Paso. The 6.14 square feet of storage per person here, lower than the national average, may indicate that the local self-storage sector has capacity for growth. There are many facilities spread out to the east and northwest of the city center, including a 24,225-square-foot property on Pellicano Drive that was sold in March 2020. 3. LAS VEGAS, NV: CONSIDERED A GOOD BET FOR STORAGE Las Vegas has a well-developed self-storage sector. Fears of oversaturation may be assuaged by a 13.31 per- cent street rate increase for standard units from $94 in 2017 to $106 in 2020. And confidence is also seen in the amount of new square footage currently under construc- tion or planned in the metro area, representing 14.4 per- cent of the total current inventory, higher than in nearly all other large US metros. The city’s population grew 11.57 percent from 2010 to 2019, boosting the self-stor- age sector. The city of Las Vegas offers an enormous 19.12 square feet of storage per person, though it should be noted that the larger metro area offers less than half that amount. No less than five storage facilities changed hands in 2020, for a total of $64.28M.
4. TUCSON, AZ: THE OLD PUEBLO ATTRACTS NEW ENTHUSIASTS Arizona’s second city attracts artists, among others, and in September 2020 one enterprising company allocat- ed space to them at its storage facility in the suburb of Oro Valley. As with other places in the Southwest, many ‘snowbirds’ come here in winter for the advantageous climate. Street rates for standard storage units in Tucson rose 11.68 percent from $87 in 2017 to $97 in 2020, while inventory increased slightly from 10.65 to 10.84 square feet per capita. There are approaching 100 storage facili- ties in Tucson and the surrounding area, with four of them changing hands in 2020, representing a combined total of 215,871 square feet. 5. ALBUQUERQUE, NM: A FINE CLIMATE ALL ROUND Duke City has a growing reputation with incomers for its distinctive lifestyle, pleasant climate, low house prices, and the beauty of its surrounding scenery. Getting on for 100 facilities within the city limits provide them with stor- age, and the street rate for a standard locker went from $91 in 2017 to $98 in 2020, an increase of 8.21 percent. The inventory also grew during that period, from 8.13 to 8.89 square feet per person, a 9.50 percent increase since 2017 and somewhat more than the national aver- age though not enough to depress rents. Market activity in 2020 consisted of two transactions for a total square footage of 84,682. Anyone thinking of investing in the US self-storage sector needs to have confidence in the enduring demand for it among the population. They can find this by pin - pointing markets where street rates have been consis- tently holding up, or increasing, even through challeng- ing times. Of late, some of the nation’s Southwestern cities have been most impressive in this regard, with rents trending upwards. Inventory levels sometimes lag behind demand and sometimes over-reach it. But whether investors wishing to build storage facilities catch the wave at exactly the right time or not, they can be reassured that the indus- try has an inherent flexibility and durability, finding new ways to provide storage for communities and adapting to clients’ needs. Self-storage has become an important element in the lives of many Americans, and that isn’t changing any time soon.
Francis Chantree is a senior editor and writer for US-based self-storage search portal STORAGECafé. He has extensive experience writing for a variety of publications about issues related to economics, lifestyle, and the real estate industry. Francis can be reached at francis.chantree@yardi.com.
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