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25 Feb 2019

Reflections on Buying and Developing at the End of the Cycle


Adam Pogoda


When I entered the storage business last year after focusing on office and multifamily deals in New York City for 10 years, I thought buying storage properties would be a cake walk in comparison. What I learned very quickly was that this was true in certain aspects and was extremely misguided in others. The truth was that with far fewer competitors for most storage deals, you could buy anything you wanted if you were willing to pay close to the ask. The challenge was determining which properties had upside after almost nine years of double-digit rent increases and a market where cap rates had dropped dramatically by 200-300 basis points.

I soon realized that you could make almost every deal look good on paper and pencil, so I resolved to spend a lot of time with our operations team to learn what constituted a good market, what was a true value-add property, when tenants were really paying under market, and which management tools could be used to add revenue and reduce expenses on new acquisitions.

My grasp of the business conveniently seems to have coincided with a slight respite from the astronomical pricing that has been prevalent in the industry for 3-4 years.

It has become clear that whether a recession is imminent or not, that some combination of new supply and topped out rents have changed many buyer’s underwriting, resulting in somewhat lower pricing.

Many deals that I passed on last summer are now suddenly coming back to me at prices that make a lot more sense. It is also clear that certain asset types are less in favor such as Certificate of Occupancy (C of O) deals, lease up plays and ground up construction. In some cases, we have seen price corrections from 5-50%. We are and have always been patient buyers, and our reward is that our company is now up to its ears in potential buys.

Perhaps one of the most exciting developments in all real estate - self storage being no exception - has been the new Opportunity Zone initiative.

Through many phone calls and in-person meetings with lawyers and accountants over the last six months, I have come to think of myself as somewhat of an expert on this complex, but tax-advantaged program. Sticking to our core values, we resolved early on to not let the ‘tail wag the dog’ and only buy or develop in Opportunity Zones if the real estate fundamentals are in place and we would do the deal anyway. Still, one of the many advantages of this program are the tax benefits that create a cushion for the downside making these deals feel less risky.

For instance, knowing that we can ostensibly get the same after-tax returns from a 2.0x equity multiple in an Opportunity Zone as a 3.0x equity multiple everywhere else feels pretty good. What makes the program advantageous for our company as well is that it essentially forces a 10+ year hold, which fits well with our strategy of buying/developing for the long term.

Going forward, I am excited to execute the business plans on these projects, weather whatever storms inevitably come, and hopefully exceed the underwritten returns for me, the company and our investors.

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