VanWest Partners, a Denver-based commercial real estate investment company, is jumping back into the “dynamic” capital markets and acquisition environment for self storage by launching a third investment fund.
The fund intends to raise $150 million in equity and will target the acquisition of self-storage facilities throughout the continental US over the next two or three years.
Specifically, the company said in a release, the fund will target existing facilities “with strong physical occupancy but are undermanaged, new construction deals that have not yet started leasing, new construction deals that have suffered from insufficient capitalization or have low existing occupancy, and existing facilities that have the opportunity for expansion.”
Jacob Vanderslice, Principal at VanWest Partners, said in prepared remarks that the net income and occupancy growth for the fund’s initial acquisitions “are already well above forecasted assumptions as the consumer demand for self-storage continues to be high.”
Targeted returns for Fund III investors are 14% to 16% IRR, and a 2X-2.25X investor equity multiple over a seven-year hold, according to the company’s release.
The third fund has its sights set on closing three properties (one in Michigan, two in Oklahoma) in Q3 that cumulatively represent nearly 300,000 net rentable square feet, 2,000 units, and $26,000,000 in total cost.
Fund Already Buying in Michigan, Oklahoma
The fund intends to raise $150 million in equity from accredited individuals and institutional investors to acquire self-storage properties where an opportunity exists to add value.
Fund III will be specifically targeting existing facilities with strong physical occupancy but are undermanaged, new construction deals that have not yet started leasing, new construction deals that have suffered from insufficient capitalization or have low existing occupancy, and existing facilities that have the opportunity for expansion.
Fund III has closed on three acquisitions representing just over $30,000,000 in total capitalization.
The next round of acquisitions is scheduled to close in Q3 and include one property in Michigan and two properties in Oklahoma. These acquisitions will represent nearly 300,000 net rentable square feet, 2,000 units, and $26,000,000 in total cost.
Pending sourcing suitable acquisition opportunities, VanWest Partners anticipates a two- to three-year deployment period for Fund III.
Numbers are Impressive
Doug Ressler, Yardi Matrix, tells GlobeSt.com that secondary markets experiencing rapid population growth continue to lead in street rate gains.
“For 10×10 non-climate-controlled (NON CC) units, eight of the top 31 metros had street rate increases greater than 5% in August, while rates decreased in seven.
For 10×10 climate-controlled (CC) units, three of the top 31 had 5% or more growth, while 10 experienced negative rate growth.
Rate of Newly Built Storage Slipping
Senior economist, Ermengarde Jabir, tells GlobeSt.com, that strong fundamentals amongst many self-storage REITs, including record funds from operations in the second quarter of 2022 on a year-over-year basis and indeed even prior to the pandemic, indicate that their net operating income will continue to increase “in a meaningful way” in 2022.
She said that occupancy rates for self-storage REITs, such as SmartStop, are still at or near record highs and the sector is still “very bullish” on its future.
“If there is weakness in the sector, it comes in the form of the growth rate of newly built storage supply, which has slowed for the seventh quarter in a row,” Jabir said.
“Nonetheless, this provides an opportunity for supply expansion in the sector to maintain a frictionless market. In the meantime, however, the dearth of new supply combined with solid demand continues to prove beneficial for rents and vacancies as there is enough supply available at the moment to meet the current demand for space.”
JLL Director Matthew Wheeler, tells GlobeSt.com that continued healthy fundamentals – along with recent investment outperformance, a stable future outlook, and resilient history in varying economic conditions – keep driving more and more capital into the sector.
“Despite the rising rate environment, 2022 transaction activity remains robust relative to historical norms, and sponsors with strong track records are having success raising equity from a variety of sources,” Wheeler said.
Record-High Rate Increases
Martha Hargrove, Executive Vice President of DXD Capital, tells GlobeSt.com, that self storage investing is increasingly attractive to investors at every level due to diverse demand drivers that keep Americans renting storage units throughout recessionary periods.
“Self storage thrives during times of disruption — a phenomenon that was witnessed acutely through the Covid-19 pandemic, Hargrove said.
“Self storage has seen record-high rate increases and occupancy combined with longer length of stay to make the asset class an attractive part of any alternatives investment portfolio.
“Self storage is also a natural inflation hedge; the month-to-month leases allow self storage owners and investors to effectively track rates each month without a large labor overhead.
“Overall, self storage continues to be attractive to investors seeking better returns in real estate. Institutional investors have quadrupled their transactions in 2022, according to Marcus & Millichap, which is another macro indication of the attractiveness of the sector.”
Self Storage Proves Economically Durable
Charles Byerly, CEO of Westport Properties, tells GlobeSt.com that self storage has now proven itself through significant economic crises over the past several years on how durable it is in down times and good times alike.
“Self storage new supply has been somewhat muted over the past couple of years with a trend of lower overall supply coming to market over the next couple of years offering up a decent runway to rental rate growth.
Byerly said that self storage requires very little in the way of capital expenditures relative to other commercial product types and does not have lease commission exposure that other product types do.
“It is still considered somewhat of a fragmented industry such that investment upside still exists by consolidating smaller and one-off operators nationally,” he said.
“More and more lenders and investors understand the product type today and the industry is attracting more and more institutional capital every day. For these reasons, self storage will continue to be a favored asset class in the short-to-midterm time frame at a minimum.”
New National Supply Pipeline Growing
Nationally, Yardi Matrix tracks a total of 4,203 self storage properties in various stages of development—including 1,594 planned, 760 under construction and 515 prospective properties.
The new-supply pipeline as a percent of existing inventory increased 20 basis points month-over-month in August. The share of existing projects in the planning or under-construction stages is equal to 10.3% of existing stock.
The national new-supply pipeline continued to grow in August, with properties under construction or in the planning stages of development equal to 10.3% of existing inventory, a 20-basis-point uptick month-over-month.
“Despite increasing development activity, we anticipate that rising costs and extended construction timelines will moderate the pace of deliveries and prevent any major surges in new supply over the coming years,” Ressler said.
A Mature Asset Class
Andy Bratt, Principal, Gantry, tells GlobeSt.com that supply has continued to be absorbed and rental rates have increased significantly since Covid-19.
“It has matured as an asset class and has become sophisticated with the attraction of institutional capital on both the debt and equity side. Capital will continue to flow into this asset class as investors see it as an inflation hedge and a preferred asset class going into a recession. Lenders still see self storage as a highly favored product to lend on behind multifamily and industrial.”