IRVINE, CA—Capital investors chasing the historical returns of the self-storage sector have prompted numerous new entrants into the industry that are forming teams to build and buy the product, Westport Properties' Ben Hall tells GlobeSt.com. As we recently reported, Hall has joined the firm as VP of acquisitions to help the company grow its East Coast portfolio. We spoke with him about trends in the sector, Westport's strategy for acquisition and what investors should look out for at this point in the cycle.
GlobeSt.com: What trends are you noticing in the self-storage market?
Hall: From a buyer's perspective, the marketplace is extremely competitive right now. There have been numerous new entrants into the industry that are forming teams to build and buy self-storage. This is being fueled in large part by capital investors chasing the historical returns of the sector. I believe this trend will continue as the risk adjusted return of self-storage continues to be greater than other commercial real estate sectors. The diversification the large tenant bases provide and low capital investments are essentially unrivaled by any other property types.
The other trend I continue to notice is newly constructed properties tend to be large—80,000 square feet plus—when compared to the average facility size closer to 52,000 square feet. This is a trend worth paying attention to since some of the newly built properties are trying to capture a much larger tenant base.
GlobeSt.com: What criteria do you use to determine the properties you look to acquire?
Hall: Covering this sector, the two main things I have learned that drive performance are 1) the more bodies the better, so Westport is trying to find higher-density trade areas, and 2) the less competition, the better, so Westport is targeting trade areas where the number of people per square footage of self-storage supplied is at or below the market's average.
GlobeSt.com: What would you caution potential self-storage buyers about at this point in the cycle?
Hall: I have been fortunate to observe a number of operating groups over the years, and the groups that have had the most success put forth reasonable budgets for operating performance. I am concerned right now that a number of groups have not seen a downturn in performance and continue to underwrite as though there will be no slowdown in the future. I do feel that some trade areas in particular are facing significant headwinds from new supply, and it will not only slow the lease-up of the new product, but also potentially cause a loss of occupancy for existing properties in the trade area while slowing or eliminating rent growth. It is important, in my opinion, to be realistic about the current and future state of supply in the trade area you are evaluating to establish the base case pro forma.
GlobeSt.com: What else should our readers know about the self-storage market?
Hall: Related to the number of new entrants to the sector, this is a great time to be a seller. Cap rates are at historical lows, and capital is looking to be invested. In this same vein, as competition not only increases but becomes more sophisticated, it is very important that owners of self-storage facilities are keeping up with operational trends: investing in revenue management, internet marketing, their call center. If that is not an option, then they must consider hiring a sophisticated operating partner with significant scale to their management platform to operate the owner's property on a third-party basis.
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
