02 May 2023
During our visit to the ISS World Expo in Las Vegas, we enjoyed chatting about all things self-storage industry with the industry experts at the show. Ridg Terry and Tyler Peterson from Trinity Real Estate Investment Services discuss the challenges in the self-storage industry due to federal rate hikes, making it difficult for brokers and developers to close deals. They have found success using seller financing, which has helped them close 75-80% of their deals. With them focusing primarily on class B and C facilities in tertiary markets, valuing under $5 million.
They go on to share their insights on the current state of the self-storage industry and where they believe self-storage will be in the next few years.
James: Ridg, Tyler, thank you for taking the time to talk. We're seeing a lot of waves right now in the macroeconomic situation for the sales towards industry with federal rate hikes making it very difficult for brokers or developers to get deals over the goal line. What are you guys seeing from your end and what do you feel comfortable reporting back and how do you get deals closed and keep business moving along?
Ridg: Yeah, I think at the end of the day, you know, you are seeing a lot of stuff on the debt side where it is making it difficult. Where we're setting precedent with our clients and really being able to push deals over the line is at the beginning setting that seller financing is probably going to be at the end of the day a route to go. So before we ever even get to selling or getting it to market, we're having the conversation on seller financing. And we found for us in the past, I'd say year, that's been the way that we've been able to get, I'd probably say 75 to 80% of our deals across the finish line.
Tyler: Just to expand on that, we've closed $60 million of storage in the last 12 months and probably $45 million of it has been seller financing. And with seller financing, it sounds great, right? But what we're able to offer is 200 bps of spread between the cap rate and the interest rate, which is probably as skinny as you want to get on buying a deal. But because of that, we're able to transact.
James: So when you guys have these deals, is it mostly class A facilities in primary markets or are you seeing a lot of underutilized, under-optimized facilities in tertiary markets that you guys work with? What is the facilities you're looking like?
Ridg: So at the end of the day, where you start to get a lot of value on the seller financing is if these storage facilities are under $5 million. So sitting on that, you're looking more at your class B and C facilities in your tertiary markets. So you'll go around here and you'll talk to everybody and it's a tertiary, secondary market value add opportunity. That's what these guys are interested in. And that's what we primarily focus on drumming up and then setting precedents that a seller financing option is probably going to need to be thrown on the table. So Tyler can probably talk to you more on it, but we like to talk to buyers about putting a four option line out for purchasing. And he can probably talk more about that.
Tyler: So we just do deals like a four-tiered LOI. The lowest offer is going to be the cash offer, but then we give maybe two seller financing options and then option four would be, we're going to assume the loan with X amount of seller financing. But as for the regions that we're attacking, if you go on like CREXI, LoopNet or whatever, if you look up an actual market, it's going to give you, let's say you look up Dallas, it's going to draw a blue line around Dallas proper. We pretty much call in a 30 minute to hour radius outside of that. So we're getting six plus cap deals still on a 35% expense load current in a line.
James: Tyler, thank you for that. I just want to backtrack and talk about those four deals usually offer, those four kind of pass forward. Which one do most sellers go for when you bring up those four options?
Tyler: So we have obviously like a 5% down, you try for 15% down, but the more you put down, the less money we're going to offer. So I'd say the sellers are more apt to get that 30% down if possible, because that way they can cover their closing cost brokerage fees if they have any loans due that they need to pay off. And so I'd say 30%.
James: Thank you so much. Just closing remarks, what are your opinions of the self-storage industry moving forward for the next year? Do you think it's going to get a lot uglier before it gets better? Or what do you guys think the forecast looks like?
Tyler: So I see storage, a lot of blood in the water coming up here in Q3 and Q4. Basically 2019, 2020, people were getting five year fixed rates. That's going to start popping in 2014, 2024 and 2025. When their 3% fixed interest rate goes to a six, they're 50% of the buying power that they were currently at. And so a lot of people are going to start having to sell and just lose a little bit of money instead of losing their entire butt.
James: Thank you for that. I think that's very accurate and only time will tell. Thank you guys so much for your time though.
