James Sprow | Blue Vault |
The self-storage sector of the commercial real estate market has been a top performer over the last several years. For example, the five publicly traded self-storage REITs had a total return in 2021 of 65.5% according to CBRE. Those five REITs reported fourth quarter 2021 revenue increases of 16.4%. Year-over-year NOI increased 20.5%. Not surprisingly, the average stock price for the REITs increased 27.8% in Q4 20211. According to NAREIT’s senior economist, Calvin Schnure, “Self-storage has had a banner year in 2021, building on its strong performance in 2020. Strong housing markets and greater mobility in an era where some employees continue to work-from-anywhere all fuel demand for storage.” In terms of cyclical vs structural changes, he said that self-storage “is riding a longer-term wave that is likely to remain robust due to strength in housing markets.” 2
A recent Marcus & Millichap investment forecast for the self-storage asset class predicts the pace of rent growth, which increased 13% on average nationally for a standard-sized unit since March 2020, will moderate as some – but not all – of the pandemic-related demand drivers decrease. 3
Changes in migration trends will also benefit the sector, particularly in satellite cities and the Sun Belt. Millennials, the largest share of self-storage users, continue to relocate to bigger cities in the suburbs or to secondary and tertiary markets. And retiring baby boomers are also supporting demand, according to Marcus & Millichap. 3
Leitbox Storage Partners’ Strategy
Riding the wave of development and increasing values in the self-storage sector is a company that develops “Fifth Generation” self-storage properties, Leitbox Storage Partners (“Leitbox”). Bill Leitner, Founder and Managing Principal of Leitbox, with his 25-year background in retail developments, defines the Leitbox approach with three primary factors: 4
“The Design is typically a vertical, 3+ story building with architectural articulation resembling an urban mixed-use project. Architects call it neo-industrial; our team calls it “urban millennial.” Location is probably the most weighted factor within the fifth-generation definition. The site selection process is almost 100% identical to retail anchor-tenant’s site selection criteria (think Wholefoods, Trader Joe’s, or Target). Use is probably the most exciting criteria. Storage is not always “simply storage” – we typically prefer to introduce what we call high-urban-street-front retail. We do not change the scope of the business plan, as this retail component with our projects is usually about 4% of the total SF. We believe this produces a great looking storefront, generates more jobs, and increases retail sales tax revenue.”
Leitbox Storage Partners is a vertically integrated, full-service development and acquisition firm. They “Do Storage Differently.” Leitbox utilizes a proprietary algorithm (Leitbox Sitefinder) to identify supply and demand imbalances for self-storage throughout the United States. Once the void is identified Leitbox executes what the firm believes is the correct strategy for the market identified in order to maximize barriers to entry, position with proximity to targeted demographics, match the architectural symmetry with neighborhood uses, and lastly, to position with convenience and efficiency for a busy customer. They call this “Market Up” execution. By aligning their strategy to local storage needs and fundamentals, Leitbox “Markets Up”. “Market Up” can either be (1) a programmatic development wherein they repeat the development of their self-storage prototype, (2) a mixed-use development with other uses outside storage integrated into the physical plant, (3) a value-add income-producing acquisition, or lastly, (4) conversion of a retail use. Not all markets are alike, so, by using a multi-faceted approach to self-storage, Leitbox strives to ensure the most important criteria remains top of the decision tree: Location, location, location.
Turning Developments into Cash Quickly
According to Leitner, one of the most attractive qualities of their developments is the ability to quickly convert a project into an asset sale and return cash. Self-storage developments can be sold at certificate of occupancy, 50% occupancy during lease-up, or as stabilized properties. The Leitbox developments can be, and have been, sold at a premium to cost at all these three stages. Short term holds with a clear path to the exit are in high demand. Advisers using this product stress the need to return capital and harvest gains as quickly as possible rather than scale the firm and charge fees.
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Footnotes:
1. CBRE Self-Storage REIT Report Q4 2021, page 1
3. Marcus & Millichap, www.marcusmillichap.com/research; 2022 U.S. Self-Storage Investment Forecast, page 8
4. Leitbox.com
