22 Jul 2024
The self-storage industry, traditionally known for its stability and necessity, is undergoing significant transformations driven by economic factors and evolving lifestyles. Despite these changes, the fundamental needs remain the same: some owners need to sell, and buyers are eager to purchase. Historically, in cycles when economic factors weakened and lowered returns for the buyer, the self-storage market was slow to adapt, often resulting in a bid/ask gap.
Economic factors such as interest rates, insurance costs, and property taxes have increased. Self-storage owners often overlook these changes when they go to sell their facility since theses increases typically are not directly reflected in their financial statements; instead, these increases are realized by buyers. Coupled with the fact that the self-storage industry is emerging from a period of peak street rates and high physical occupancy due to evolving lifestyles influenced by COVID-19, sellers' value expectations remain elevated. In this cycle, the bid/ask gap is wider and has persisted longer. Consequently, strategies for buying and selling within the self-storage market must adapt accordingly.
In this dynamic environment, both sellers and buyers are employing innovative strategies to facilitate transactions. Here are some of the creative approaches being used to make deals happen.
One of the most popular creative financing methods in the self-storage industry is seller financing. In this scenario, the seller acts as the lender, allowing the buyer to pay for the property over time, typically with an initial down payment followed by monthly installments. If the property has low leverage, this arrangement benefits both parties: the seller can command an above market sale price, reduce exposure to immediate capital gains taxes and earn interest on the loan, while the buyer can acquire the property without seeking traditional financing at currently elevated market interest rates.
Lease-to-own agreements are becoming increasingly popular in self-storage transactions. This arrangement allows buyers to lease the property with an option to purchase it after a specified period. A portion of the lease payments typically goes toward the eventual purchase price. This method provides buyers with time to build their credit or gather the necessary funds while securing their desired property. For sellers, it ensures a steady income stream and potentially a higher sale price.
Joint ventures and partnerships are creative strategies that allow multiple parties to pool resources and share risks and rewards. In the self-storage sector, this can involve a combination of equity investors, operators, and developers collaborating on a project. Such partnerships can help buyers who might lack sufficient capital or experience, while sellers can benefit from a quicker sale and ongoing involvement in the property's success.
To attract cautious buyers, some sellers offer buy-back guarantees. This arrangement provides a safety net for buyers, assuring them that the seller will repurchase the property at a predetermined price if certain conditions are met. This guarantee can reduce the perceived risk for buyers, making them more willing to proceed with the transaction.
Deferred payments and earnouts are flexible transaction structures that align the interests of both parties. In deferred payment arrangements, a portion of the purchase price is paid over time, often contingent on the property meeting certain performance metrics. Earnouts tie part of the payment to the future financial performance of the storage facility. These structures can help bridge valuation gaps and provide sellers with a potential upside based on the property's success under new ownership.
As the self-storage industry evolves, creative transaction methods are increasingly essential for closing deals. Strategies like seller financing, lease-to-own agreements, joint ventures, buy-back guarantees, deferred payments, and earnouts are helping sellers and buyers navigate the current market landscape. These innovative approaches not only facilitate transactions, but also contribute to the sector's growth. With shifting market conditions, the ability to think outside the box is crucial for the success of self-storage transactions.
The key question remains: will these creative methods be a temporary solution or become a permanent feature of the industry's new normal?
Before joining Lindsey Self Storage Group, Matt Wess began his self-storage career in 2008 with SecurCare Self Storage, where he oversaw acquisitions. In 2013, SecurCare became one of the three founding Participating Regional Operators (PROs) of National Storage Affiliates (NSA) before transitioning into a Public REIT in 2015. In 2019, Matt moved from his role at SecurCare to become the Manager of Acquisitions at NSA, where he played a key role in sourcing acquisitions, underwriting, transaction structuring, due diligence, and investment committee reviews for the company’s real estate acquisitions.
Throughout his career, Matt has successfully completed transactions for hundreds of facilities valued at several billion dollars. He holds a Bachelor of Business Administration in Management Information Systems from the University of Iowa’s Henry B. Tippie College of Business.
In his spare time, Matt enjoys attending his two daughters’ volleyball games and tournaments, going to the gym, snowboarding, mountain biking, traveling and of course attending the multiple self storage conferences.
Lindsey Self Storage Group aims to provide both buyers and sellers alike with the highest level of brokerage services. We pride ourselves in keeping our clients up-to-date with the latest industry information and news, as well as supplying them with each piece of information needed for buying or selling a self-storage facility.
Co-Founded by Alan and John C. Lindsey, Lindsey Self Storage Group’s only focus is self-storage. We are backed by over 50 years of experience in every aspect of the self-storage industry, including, but not limited to: brokerage, development, and management.
