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Finding the Perfect Apartment Building

Posted on by SVN

Investing in Apartments Includes Some Benefits

Apartments are the hottest class of commercial real estate and are likely to continue being hot for a while. Independent of the unique demographic and economic drivers for their success in the current post-Great Recession economy, there are a few basic truths that make them attractive:

  • Housing costs usually move up and apartment rents can be adjusted on a regular basis.
  • Vacant units are easy to re-rent with little or no cost. In fact, tenant security deposits usually pay for cleaning and repairs.
  • Excellent financing with 80 percent leverage is readily available.
  • Relatively easy appreciation through making cosmetic upgrades to increase rents.

…But Apartments Also Include Some Downsides

For many investors, though, apartments have three key problems compared with other classes of commercial real estate. They have tenants that break things, complain and fail to pay rent. Apartments have kitchens that tend to start destructive fires. Finally, they have bathrooms that leak and cause damage to surrounding units. At the same time, many cities heavily regulate apartments and, in many cases, favor tenants over landlords. These problems make apartments challenging and time-consuming to own.

Imagine, for a moment, an apartment building without tenants, kitchens or bathrooms and with little or no government oversight. All that you would have are rooms with furniture, clothing and other items in them. If you have ever owned an apartment building, you know that a building like this one would be a dream to own!

The Solution: Self Storage Facilities

In fact, the perfect apartment building is a self-storage facility. Mini-storage facilities offer a similar ownership experience to apartments but without any of the drawbacks. Because they frequently serve apartment tenants, their performance tracks the apartment industry, as well. Furthermore, modern management systems make them much easier to own than many people realize.

Read more of Solomon Poretsky’s blog posts here.

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Self storage: Q4 2012 Report and Outlook for 2013 by Nick Malagisi

Posted on by Diane Danielson
Nick Malagisi
Nick Malagisi, Self Storage Council Chair

As chair of the Sperry Van Ness® Self Storage Product Council, I am pleased to provide this quarterly report on the self storage industry. This report is intended for owners, operators, vendors who service the self storage industry, investors in this particular product sector and the over 800 Sperry Van Ness advisors serving clients in 175 markets across the country.

As most of you already know, this investment product sector is a niche industry with the real estate value dependent on the operating business component. The stronger the management, the better results one should see to the bottom line. In that regard, our industry is very similar to the hospitality industry.  However, the self storage industry has not yet found a way to “flag” the facilities and create brand awareness. Its time will come.

This past year has seen a continued and  healthy improvement in the sector, led by the four public REIT’s that have had seven consecutive quarters of increased occupancies and revenue after nine consecutive quarters of losses beginning in 4Q 2008.  Public Storage remains the industry leader in  number of facilities across the country including its European division bought from the absorption of Shurgard operations some six years ago. Public Storage is also the leader in stock price at a high value this year at $130 price per share or three times the value of the next competitor, Extra Space. Public Storage stock was included in the S&P 500 and Dow Jones Industrial Average a few years ago, replacing such household names as Sears & Roebuck.  The 3Q earnings reports have just been announced and all four of the self storage REIT’s continue to perform well.

New development of the product has been at a virtual standstill these past four years, which has helped supply catch up with demand in most markets as the industry doubled in size from one billion to two billion square feet from 1995 through 2006.  The dearth of new construction has created an opportunity for the larger operators to gain market share by having the capital to purchase existing facilities, especially in the top tier markets.

Cap Rates in the top tier markets are in the 6.5-7.5% range while the rest of the country is seeing 7.5-9.0% Cap Rates. The coming year should be very interesting as those facilities that were financed with 10 year debt in 2003 will be coming to the market for either refinance or sale.  It remains to be seen how many of those properties have retained their value and will qualify for refinancing without a recapitalization.

The Sperry Van Ness organization has self storage specialists located across the country who can become a valued resource for you.  If you are interested in the investment opportunities in this area, reach out to the SVN advisor in your market and watch for opportunities to buy and sell as they become available.

Nick Magilisi,  Self Storage Council Chair, Sperry Van Ness/Commercial Realty

 

*All Sperry Van Ness® offices are independently owned and operated.