Acquiring and Renovating Older Facilities
A Hot investment strategy for today’s Economy
By Scott Meyers
NOTE: Scott will be appearing at Traction REIA on November 20, 21, 22 & 23. Click here for more details: http://TractionREIA.com/scott
The ongoing recession and the subsequent lack of development capital has created a shift in strategy by both Self Storage Developers and investors. There has been a great deal of activity in the market for those willing to buy Class C facilities, and create value through renovation and repositioning. Class C Self Storage Facilities are generally defined as older properties in need of repair or updating, often first generation, single-level sites that may be unfenced, and typically lack in security features and amenities commonly found in Class B or Class A Properties. They may also possess a less desirable unit max and orientation with regard to door operation, upper levels, and lack of temperature control. They may also suffer from having poor access and limited visibility and subsequently, rental rates are lower than Class A or Class B Properties.
This may not sound so appealing to the masses, but don’t discount the potential for the savvy investor who is willing to put forth the effort in turning these ugly ducklings into beautiful, competitive, swans. Many investors have made a small fortune focusing solely on Class C Facilities and improving them to the point of being a solid, Class B contender in the marketplace. And it’s not as tough as one may think. Though the leap from a Class B property to a Class A property is difficult, you’ll find that the jump from a Class C property to a Class B property is not nearly as daunting or as capital intensive.
Which leads us to the question of how to go about finding these diamonds in the rough? Uncovering these gems is no more difficult than finding a good piece of undeveloped land, and in many cases it’s quite a bit easier. First, there are a number of these facilities listed with Commercial real estate brokers, Self Storage brokers, business brokers, and on commercial and self storage websites. You can also get a comprehensive listing of all facilities in a given market by purchasing directly from the numerous list brokers who have the names and addresses of all the facilities and their owners in a geographic area. You may also begin the process with a mailing campaign, or just by cold calling the facilities in person or by phone after “Googling” all the facilities in your targeted market(s) for acquisition.
And contrary to popular belief, banks are ready and willing to make loans on Self Storage Facilities as our industry has generally enjoyed the lowest loan default rate of all commercial real estate asset classes dating back to the 1970’s. Most notably, the Community Banks, Credit Unions, and Savings & Loans that are located in the communities in which the facilities are located. And due to the strong performance in the Self Storage sector, many investors are being welcomed with open arms when presenting a loan request for their Self Storage projects, and are receiving very favorable rates and terms, along with the additional rehab capital and deferred payments to boot! Since the lending institutions have increasingly moved away from making “speculative” loans on development projects in favor of making loans on income producing assets with a historical track record of measurable performance, it has paved the way for investors with a solid business plan and thorough due diligence to acquire funding for Class C Facilities from the local lenders where these facilities are found.
When thinking of ways to upgrade Class C Facilities to a Class B facility, remember that the changes that you put in don’t necessarily have to be major. The obvious place to start is with Curb appeal. What are the colors compared to the newer facilities in the area? Are all of the buildings weathered to the point where the roof, walls, and doors have all faded to 1 shade of “gray” or “tan”? A color change by one of the many industry vendors specializing in this area can do wonders for the appearance of your new acquisition. Similarly, the addition of a new sign, with color coded flags, banners, and other attention grabbing marketing media will draw their eyeballs to your new paint job and raise awareness of the changes you have made.
The next point to consider, which has the most impact on forcing the appreciation and value of the facility, resides with any vacant land on the site. The smart investor will immediately assess the highest and best use of any vacant land at the site or any adjacent land that may be available for purchase. Depending upon the market, once you’ve improved the look of the facility and made some management improvements, you should be rewarded with higher occupancy and the possibility of constructing additional buildings/units at the site. Oh, and Don’t forget to look at the existing boat/RV lot as the return on constructing additional buildings on that land generally outweighs the ROI of leasing out parking spaces. And if you’ve run out of room, contact the neighbors to assess whether there may be an opportunity to purchase additional land/buildings for future expansion. This is probably the greatest way to increase the value of your facility while simultaneously “scratching your development itch”.
Now it’s time to turn our attention to the multiple amenities that can be added to upgrade your facility. Adding a small retail center to your site is probably the simplest and least costly way to improve the bottom line, and provide value to your customers. Next, you may want to consider whether it’s feasible to offer truck rental services through a 3rd party provider or by purchasing or leasing your own truck and offering it to your clients for free or at a reduced rate. Can you add a pack & Ship Center, Bill Boards, Vending Machines, a Business Center, perhaps temperature control units, propane cylinder exchange, Records Storage or any combination of the dozens of amenities that are available in our industry to add to your facility? Class C Facilities will vary by site and by market, so you need to perform some research into the feasibility of adding each amenity, but the increase in income and the return on investment may be surprisingly rewarding.
And last but certainly not least, is to adopt the latest technology to round out your renovations and repositioning. Security remains at the top of our customers list when choosing a facility and advances in technology have made it affordable to provide state of the art surveillance systems with wireless cameras and large screen monitors for a fraction of the price we paid in the recent past. What to do with that apartment? Renovate it and turn it into a business center outfitted with wi-fi and a few workstations for your small business clients that need a place to come out of the elements to plan their day or send a few emails. And of course, the addition of a CRM platform that incorporates the newest software and a kiosk should be considered in each and every location.
However, success in your newly repositioned site cannot occur without developing and executing a detailed marketing plan. This can be carried out with the aid of the multiple technology partners to automate and capture your prospects is critical to competing with your well -heeled class A competitors. Paying close attention to these 2 critical areas will determine your success in both improving cash flow while simultaneously increasing the value and forcing the appreciation of the asset. Furthermore, it never ceases to amaze me that when occupancy is low, and traffic is down, some operators decide to actually decrease their marketing efforts; the very thing that brings customers in the door! The most successful operators I have encountered use their marketing plan to guide their daily activities. It has specific daily tasks that all center around the daily, weekly, and monthly goals laid out by the organization. Results are usually measured on a monthly basis and then compared to the prior month’s activity to gauge the success of the most recent campaign. And of course none of this can be attained without the efforts of a well trained and motivated facility manager.
The laws for success in the Self-Storage industry are always changing and buying Class C Facilities has quickly become a very viable addition to a successful investing stategy – especially in this time where development has slowed to a crawl. The merits of this strategy have proven to be very profitable to many operators who have chosen this path rather than focusing solely on development. And being one of those investors myself, this author couldn’t agree more.
Scott Meyers is the President and Owner of Indianapolis Based Self Storage Profits, Inc. He is also a national speaker and trainer in the field of Self Storage Investing through his education company. Scott will be appearing at Traction REIA on November 20, 21, 22 & 23. Click here for more details: http://TractionREIA.com/scott