Updated: More Institutional Capital Targeting Self-Storage Sector Competing with REITs
Major institutional investors are ramping up their investment activity in the self-storage sector, even as public REITs continue to pull off the biggest deals.
[Editor’s Note: This story was updated Thursday morning May 19th with news of the Sovran Self Storage deal.]
This morning Sovran Self Storage Inc., a self-storage REIT, announced it has agreed to acquire LifeStorage LP, a privately-owned operator, for $1.3 billion, payable in cash.
LifeStorage in Roseville, California, is the sixth largest private owner and operator of self-storage facilities in the U.S. with 92 properties in nine states.
Sovran has secured $1.35 billion in bridge financing to provide certainty of closure, but the REIT intends to permanently finance the transaction with proceeds from equity and debt offerings.
The deal highlights the active investor interest the sector has received recently. This spring, Toronto-based Brookfield Asset Management Inc. and its institutional partners acquired Orlando-based Simply Self Storage for about $830 million. Simply Self Storage has over 15 million square feet of storage space with over 192 operating facilities.
Crow Holdings Capital-Real Estate, a Dallas-based asset manager of private equity real estate funds, this month announced it plans to expand its investment activities in the self-storage property sector. As of April 1, 2016, CHC had acquired or provided joint venture development equity for 14 self-storage facilities, representing 9,780 units and nearly 1.1 million net rentable square feet across the U.S.
“We have been following this sector for quite some time, and believe the timing is right to focus our investment strategy,” said Ben Doherty, Crow Holdings Capital’s head of self-storage investment. “This is particularly true because the sector is less reactive to the typical market swings that have impacted core asset classes during economic cycles.”
Doherty described the storage space market has possessing strong fundamentals but highly fragmented with a lack of institutional ownership that he believes may be ripe for a consolidation strategy, especially among Class A property.
Another institutional investor, Prime Group Holdings, has been among the largest buyers of self-storage properties. Year to date, it has spent over $150 million through its Prime Storage Fund I and is under contract to close on another $185 million in self-storage property. In total, PGH expects to buy more than $450 million of self-storage properties this year.
Robert Moser, a partner in Saratoga Springs, NY-based Prime Group Holdings, said he has seen an increase in the number of suitors chasing deals.
“My partner and I participated in the institutional roll-up of the mobile home/RV park industry in the late 1990s and 2000s. In addition we own over 30,000 apartment units which we consolidated over the past 15 years. The run that we now see in storage is not unique,” Moser said.
The demographics driving self-storage are very similar to those for Class B apartments, Moser said. They are both “need based” asset classes.
“The need for storage is tapped by virtually all life events: marriage, divorce, birth, death, buying a new home, downsizing, retirement, going to/from college or seasonal housing, etc. But it’s not just traditional storage tenants driving the demand. Commercial tenants, such as pharmaceutical reps and contractors, comprise over 30% of our tenant base,” Moser said.
Prime Group expects to hold final closing on its Prime Storage Fund I next month anticipating total commitments of $150 million, which would well exceed its target of $100 million.
It plans to bring Prime Storage Fund II to market later this year. Targeted total commitments for that fund will be substantially larger than Fund I, Moser said.
Richard Bird, who serves as the national director of Marcus & Millichap’s self-storage specialty group, said he is not the least surprised that more major institutional investors are ramping up investment activity in the self-storage sector.
Bird said the fact that several self-storage REITs consistently outperformed their counterparts in other property types early in the cycle attracted a lot of interest from other major investors looking for solid yields and lower volatility.
“That’s when our phones started ringing off the hook,” Bird said. “Over the last three years, our division’s sales volume has grown 200%. Recently an asset we were marketing attracted nearly 50 bids. The same property probably would have gotten maybe five to 10 bids just a few years ago.”
Bird, who also serves as regional manager of Marcus & Millichap’s Denver and Boise offices, said the influx of investors has resulted in aggressive cap-rate compression, but continued demand for high-quality storage space has kept rents for self-storage units on pace.
“There’s a misconception that self-storage is recession proof. That’s not the case,” said Bird. “We did see a dip in the recession, but not to the same extent as other property types. We’re not recession-proof, but self-storage performed fairly well in the last downturn.”
As for all the new money chasing self-storage, Bird said the most successful investors are those that chose to partner with local operators.
“The smart money is teaming up with experienced operators when they enter the market. It’s a specialized business. The biggest mistake someone can make is to come in here and think they’re going to figure out and run the business themselves. It’s not as easy as everyone seems to think.”