How to evaluate a self storage property? What do self storage REITs look for when buying new properties? Kris Benson, Chief Investment Officer for Reliant Investments shares some insights into this recession resistant asset class. Reliant is one of the top 25 commercial Self Storage operators in the US. They have completed over $650 million dollars in self storage acquisitions and dispositions in the last five years.
Tell us a little bit about you.
My background is as an institutional sales guy for a long time, I worked for a number of companies in the medical device industry. I got into real estate while I was a part of that organization, I was super fortunate to be a part of the company and their incredible technology. I started in real estate very much like many investors do. We started buying duplexes in the town that we lived in, or in and around that area. And very quickly realized that that was going to be very challenging to scale, that network of properties. And so we ended up selling those and I heard or read, I wish I could give credit to who I heard it from, but basically, the idea was big deals and small deals are the same amount of work. You just make less money on small deals. And so I got into commercial multi-family, and we ended up building from the ground up a 64 unit apartment complex. And that was the start in our commercial real estate world. And from there, we invested in a number of multi-family properties across the US both passively and on the direct side purchased our own. And about four years ago I got involved with self storage, first as a passive investor and then joined Reliant where I am the CIO. And so it’s been an interesting journey and I certainly learned a lot along the way.
What are some of the things that you look for in a property before making an investment?
We’ve two guys who are underwriting deals quite a bit, they probably see two to three deals a day come across the desk. Where we start is the market and we’re looking at very similar demographics to what you may look for any asset class. Traffic count is a big one, understanding how many cars are going by per day in storage is interesting in that the market is really the one, three, and five mile radius around your facility. That’s the data that really matters. Because people typically are not traveling too much farther than that to come to a storage facility. We don’t have amenities, it’s a garage. There’s not necessarily specific amenities people will travel to like they may for a multi-family property or an apartment. Population growth, job growth, average income, median household value, those are some of the pieces that we are looking at to understand who the potential tenant may be, and the strength of the market. A big component of it is understanding the competitive set in that particular market as well. So who are the competitors going to be? Are they going to be institutional REITs or is it going to be a mom and pop competitive set? So we try to build a story around each one of the properties we’re purchasing. So it’s a number of different data points that we bring together.
After it passes all of these data points, what are some of the ways that you add value, or look at adding value in a particular property?
On our side it’s different for each property that we are looking at. We don’t go into a particular value add strategy and it’s the same for every property. We’ve sold 36 properties, and the majority of those have been sold to the REIT’s. So we look at each property with a lens of what our exit could be. Sometimes we may go into a facility that’s cash flowing currently, and maybe it’s been operated by a mom and pop owner and they have some additional acreage that they’ve not capitalized on and we may build it do an expansion. We could build an additional 15,000 square feet and get that leased up.
Obviously, our goal is to try to grow the NOI on that particular property. That can be one value added strategy. What’s interesting about storage is that the marketplace is very fragmented. The REIT’s own about 20 to 25% of the market and the rest is very much fragmented between regional operators like us at Reliant, and operators, like mom and pop shops who have one or two facilities. And usually in those mom and pop operated facilities, there’s a lot of low hanging fruit to glean additional revenues. And so sometimes the value add is building out some ancillary income streams like doing U-Haul truck rentals, or a retail component where we’re selling locks boxes, those types of items where maybe the mom and pop operator just didn’t capitalize on that opportunity. So, we look at each property differently and then as we underwrite we add what that value add is, or business plan may be.
When you look at exiting to a REIT, what do they look for in your properties when they are purchasing them?
I can’t say for 100% sure, because we’re not a REIT. But typically they’re looking for a market presence in an area that they think has upside, that will help them grow their portfolio. If I’m a Cube Smart or a Public Storage or an Extra Space, they have significant scale across the country, and they’re looking for access to some particular markets where they can buy an asset that they don’t have to take the construction risk on. Reliant is willing to go in, take some construction risk, get it leased up. They’ll come in and say, all right, we’ll take it from here and they can be the exit. I think they want to be in strong markets and there are some particulars about the property itself where they want to see a certain percentage of climate controlled units versus non-climate controlled, they want the retail office to be of a certain size and scale so that it fits in with the rest of their portfolio. But each REIT is going to have its own acquisition criteria. And our goal is to quote unquote, institutionalize a project so that it will be attractive to that potential exit.
In terms of technology tools, what kind of tools do you recommend new self storage investors using for analyzing, managing, etc a Self Storage property?
I think it depends on what specifically you’re trying to do. We use a company called Sitelink, which is the operational software that our team on site is managing the property with. Literally taking in the leases, managing rental payments, accounts payable, accounts receivable, those types of things. And it gives our operations team a pretty significant report writing tool and data analytics component to it. For somebody who’s newer if they’re looking to buy their first facility or something along those lines, Sitelink may be a bit of overkill. There are definitely some smaller software tech tools that you can use that are probably a little bit more cost effective. But when you get to scale, we have 44 properties across eight states, you need something that’s a little bit more robust.
Anything else that comes to mind in terms of technology tools that you guys have been using that are useful?
We’re using a number of data reporting analytics type software tools on the acquisition side. So understanding market demographics, Radius is one of them that is doing some Self Storage specific data where they’re trying to understand the development pipeline so you can go out and see what properties are currently in the development pipeline, and also what the rent rate growth may be in a particular market. So we’re using those as well as part of our acquisitions opportunity. I think it just depends on the specifics of what you’re trying to accomplish. There has been significant technology advances over the last three or four years in self storage and so essentially, anything that you’re trying to do you probably has a technology solution for.
What is happening with self storage right now, and what do you think the near future holds for this asset class?
I would say that we’ve been very fortunate. But as far as how the asset class has been affected by COVID-19, typically the demand for storage is driven by a change in people’s lives. There’s something called the four D’s of self storage: death, divorce, dislocation and downsizing. Unfortunately, in an economic environment like this, there happens to be a lot of all of those things happening. So what we’re seeing in our own portfolio and at a national scale is that demand has stayed pretty constant. delinquency rates have stayed really low, most people are paying their rents. I think the the future as far as customer behaviors, certainly the touchless lease option has been a big part of this where tenants don’t want to come into the office and expose themselves to another human. The ability to do the entire leasing process online, the touchless lease will be something that we’ve established now, but certainly for the future, I think you’ll see more and more users establishing that. I think the future of self storage looks pretty strong based on what’s happening right now. What’s interesting is that through 2007, 2008, 2009 storage performed very admirably in the last economic downturn. So, if we come through this next economic, whatever COVID-19 ends up to be, if if we come through it relatively unscathed, I think the attractiveness of the asset class is going to skyrocket because you have two separate economic impacts that the asset classes made it through untouched, and I think there’s going to be a lot of capital chasing these deals.
I started taking interest in Self Storage about a year ago when I learned that it’s recession resistant. It’s a phenomenal asset class. Is there anything else that is important for our audience to know?
Self storage is an interesting asset class. It’s not a great fit for everybody because there’s certainly an operational business component to it. But if you’re interested in learning more, we have a bunch of videos on our website, educational content, it’s all free at Reliantinvestments.com that people can check out, and if you’re interested in learning more about our investment platform, that’s available to you there as well.