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05 Apr 2021

When You Invest in a Self Storage Project, What Do You Really Invest In?


WILMETTE, IL / ACCESSWIRE / March 18, 2021 / At the end of 2020, one of the largest self storage companies announced the investment from one of the world's tech billionaires. This is not surprising news in a world where safe return on investment is hard to find.

If one of the world's richest people cares to invest in self-storage, we may all want to learn a bit more. Cogent Capital Group, an experienced self storage developer, shares their insights and tips on investing in self storage.

Self storage is not sexy itself. But its return might be.

Self storage is not a sexy business. Simply speaking, customers, like you and me, could rent a "storage unit" in a self-storage building, to store anything from old books, unused furniture, to luxury cars.

Then why would one of the tech billionaires and one of the world's richest men bother?

Interestingly enough, the consumer behavior in self storage businesses resembles that of a gym membership. "Many customers come to storage and plan to leave their possessions for several months and end up paying for years of service," said Ned Mahic, CEO of Cogent Capital Group. Most possessions in self-storage are kept for their sentimental value. In addition, the monthly rent of most storage units is very affordable, ranging between US$35-$500. The affordability and inertia to move things around result in stable cash flow from self-storage facilities.

Besides its stable cash flow, self-storage is resistant to down cycle. When the misfortunate events happen during a down cycle, homeowners, restaurant owners, business owners, etc. have to move or close their businesses and tend to use self-storage to temporarily store high-valued items during the transitions. In a down cycle, the occupancy rate of self-storage goes up, and the rental income from self-storage is not reduced but increased.

"If you happen to come across a self-storage development deal, you might have a high chance of getting a compounded return of more than 18%. It is a much better deal from the start, compared to multi-family development," added Ned, "The cost of building self-storage facilities is almost 50% less than condos or multifamily in the same area, but the revenue per square foot is almost the same." Self-storage buildings are almost like a simple big box containing many small boxes within. There is no kitchen or shower, which obviously saves a significant amount of cost.

What makes a self storage development project successful?

Like any other real estate asset, location always matters.

"Self-storage is a three-mile business," commented Nicole Blajan, the President of Acquisitions at Cogent Capital Group, "Customers generally look for self-storage facilities within 3 miles for convenience." She also shared that the way the Cogent team approached site selection is data-driven and methodological. They created a proprietary evaluation system to assess the economical, demographic, and competition factors around the potential site.

After choosing a specific site, the construction starts. The project sponsor's ability to manage construction projects on time and on budget is critical. This is where most sponsors failed.

According to McKinsey & Company's report, large projects across asset classes typically take 20% longer to finish than scheduled and are up to 80% over budget. Typical self-storage development project costs between $10-30 million. It can't afford to hire a team of project managers to coordinate and monitor project progress. The sponsor's intimate knowledge of construction and access to reliable construction services are key to project success. Any budget over-run or time over-run hurts investors, bottom line.

Brian Coninx, COO & Head of Development at Cogent Capital Group, is a recovering civil engineer. He explained, "Cogent is a fully integrated design and build development company. The way we put these two elements together is to reduce the gap between "design on paper" and "construction in action". Whatever we put on the paper would be able to execute timely and accurately in reality. This unique practice saves us lots of time and money." Unfortunately, not every sponsor has the in-house capacity to accomplish this.

Last, it comes to leasing and operation of the facility. Reputable developers, like Cogent Capital Group, will be able to hire best-in-class operators like public storage to manage their facilities and generate the best possible return for investors.

All these efforts sound achievable in theory, the recent COVID-19 pandemic serves the ultimate test of the sponsor's abilities to turn promised return on paper into reality.

Promised return is a number on paper. People are the magic force to realize a return in reality.

The COVID-19 pandemic is a nightmare beyond imagination for many developers. It disrupted supply chains globally, which not only dramatically increased construction material costs but also delayed shipments. In addition, the lack of health guidelines from the government, especially at the beginning of the pandemic, created confusion and anxiety at construction sites.

All the challenging situations serve as the ultimate test on the developer's abilities to adapt and execute.

Most failed. Rare few thrived. And Cogent Capital Group is one of the rare few.

During the strike-on of COVID-19 Pandemic, Cogent Capital Group was in the process of developing a 100,000 square foot self storage project at 450 Belleville in North Arlington, NJ (only 7 miles away from Manhattan, NY). Instead of choosing the seemingly mandatory way to shut down the site, the management took the interests of all parties involved into consideration. They holistically examined the safety issue of leaving a work-in-process construction site unattended, the challenges of no income for the construction crew, and the urgency of offering affordable space for many small essential businesses.

In the end, the Cogent management team went out of their way to collaborate with the government, general contractors, construction crew, and neighbors to the site and came out with a plan that worked out for all. The construction project was completed on time and on almost $1,000,000 below the planned budget.

It is the fourth month the facility is in operation. Its leasing rate reached 22%, which is two times higher than projected. Eighteen months after the construction started, Cogent Capital Group is finalizing an exit sale, which would realize an annualized IRR of 24% to investors.

"We are not a developer constructing just another building, we are a member in the town and creating a community here," said Ned Mahic. "Even before the construction, we extended our water line to provide water for a neighbor next to our site. He didn't have financial resources to fix the water problem for 10 years."

This success story of Cogent Capital Group is an example of how an excellent developer could even deliver excellent return in distressing times. It is the team's expertise, resilience and sense of social responsibilities that make a difference in performance. Financial success is just a byproduct.

Thumbnail: Photo by Suzy Hazelwood from Pexels

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