Vindication … Finally?

Posted by msmessenger on Feb 1, 2016 12:00:00 AM

Self-storage is on fire! Since 2013, it has crushed the competition in the commercial real estate investment market place. The self-storage REITs are outperforming NAREIT quite significantly, adding to the credibility of our sector. More money is pouring into self-storage investments from sources that would have turned their noses up at the idea of investing in self-storage in the past. Is self-storage on its way to be the darling of the commercial real estate industry? Is the day coming where highbrow investors pass by a storage facility in their portfolio and proudly state, “That’s one of my premier investments!” Yeah, I know, let’s not get carried away here, but it is one of the best producing investments in their portfolios, and that’s what I want to focus on in this piece.

What does this interest in the sector mean? Well, with the amount of investment flowing in, it’s a great time to be a seller. Deals are transacting in the 50 to 100 largest MSAs in the United States at cap rates we would have laughed at 10 years ago. And that was a crazy time for acquisitions. Is this another bubble? I’m not sure, and I do not feel qualified to even opine on that. I see some softening in certain markets. I hear the Fed raised interest rates by 0.25 percent. I hear the political rhetoric. And I think, it might be time to be prudent. There might be some fog on the horizon, and it might be wise to turn off our high beams and slow down a little.

I am taking my own advice. I may be foolish to do so, but it doesn’t mean we stop. The big guys will always be aggressive on the prime deals. They have to deploy their capital. They have to grow. Their growth is accretive. Those of us from small to mid-size operators need growth as well, for the same reasons, on a smaller scale. So, do we acquire? Should we consider developing a new property? I think the answer for both questions is yes, yet I think the answer is more complicated.

We must stay true to our discipline in our deal underwriting. We have to remember what our investors’ expectations are for cash-on-cash returns, internal rates of return, or yield on all-in cost. Being too aggressive in our underwriting and missing our investors’ expectations will lead them to second guess future investment. Therefore, dig a little deeper to find the deal that makes sense for your investor. Don’t over drive your headlights, crunching your numbers so hard that you might not deliver. It will perpetuate your growth, your company’s growth, and the growth of your investment base. That’s the real vindication.