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November 20, 2020December 14, 2020

Breaking Down the Biden Tax Plan

By: Yann Reichelt, CPA, Advisor

Although no formal plan has been released there are multiple levels within the Biden Tax plan which should be noted by business owners. Corporate tax rates can be expected to rise to 28% from the current 21%. A 7% tax increase may not seem ideal for business owners, but it is 7% less than the corporate tax rate of 35% before the Trump tax reforms of 2017.

A concern of commercial real estate investors has been the repeal of like-kind exchange rules. Under US tax law like-kind or 1031 exchanges allow for a transaction or series of transactions to allow an owner to dispose of one asset and acquire a replacement asset. The generation of tax liability during these exchanges may make owners think twice before selling their assets.

If the Biden Administration successfully repeals the 1031 exchange, we may see a shift towards investor’s usage of a lesser-known tax deferral strategy known as a 721 exchange.

Under a 721 exchange, a seller transfers their investment into a Real Estate Investment Trust (REIT) and Umbrella Partnership Real Estate Investment Trust (UPREIT) and in return receives ownership shares of the REIT/UPREIT. It is important to note that similar to a 1031 exchange, the resulting capital gains from the sale of the investment property in a 721 exchange is only deferred, not avoided. Additionally, there are two key differences between a 721 and 1031 exchange. First, once a 721 exchange is completed, there is no “switchback” – i.e., the REIT/UPREIT shares cannot be converted back to real estate through a 1031 exchange or subsequent 721 exchanges. Second, if the REIT/UPREIT sells a portion of the portfolio and returns capital to the investors, the investors will be required to recognize any capital gain or loss when they file their taxes.

Another potential drawback for the commercial real estate industry is the proposed limitations for investors’ use of real estate losses. If you sell your investment property for less than your cost basis, you can use that loss to offset all of your capital gains from other investments and up to $3,000 in income from other sources in the current year. The combination of preventing investors from using losses to offset capital gains and the potential repeal of the 1031 exchange are significant setbacks to the real estate industry.

Proposed changes to reduce the Estate Tax Exemption to $5 million from $11.58 million is another item that individuals should be aware of. Currently, this provision allows for tax-free exclusion on the transfer of an estate up to $11.58 million with any excess taxed at a rate of 40%. As a result, business owners interested in valuing and transferring their assets to family members may need to assess the impact of cutting the exemption in half.

Other Expected Changes under the Biden Tax Plan:

We can expect to see tax credits within the manufacturing industry. The goal is to revitalize facilities and ideally increase production in the US. Currently, there are 565,537 manufacturing businesses in the United States a 1.4% decrease from 2019. China is the leading manufacturer in the world with over $2.01 trillion in output followed by the US at $1.867 trillion.

The pharmaceutical industry can expect to see incentives eliminated to move production overseas. Germany leads the world in drug export revenue at $62.3 billion. The United States hits the list at number 5 generating $22 billion dollars annually.

Pharmaceutical production isn’t the only list that Germany sits at the top of, they are currently the most energy-efficient country in the world. The Biden tax plan proposes to extend tax incentives that generate energy-efficient and clean energy jobs which could help the US climb from their current position as the 13^th most energy-efficient economy.

New market tax credits provide incentives to businesses that invest in low-income communities. Under the Biden administration, we can expect to expand tax credits for investors willing to initiate growth in these new markets. Additionally, business owners can plan for more tax credits under the low-income housing tax credit. This is a dollar-for-dollar tax credit for affordable housing investments.

Tax credits to encourage businesses to build child care facilities onsite. With 64.2% of households having two employed parents and 23% of households being run by single parents, onsite daycare would alleviate many parental concerns.

One last tax credit to be on the lookout for are tax credits to improve accessibility and compliance for the Americans with Disabilities Act. The ADA prohibits discrimination on the basis of disability in employment and requires business owners to provide reasonable accommodations for employees with disabilities. Although smaller businesses will not be able to take advantage of these tax credits (businesses with fewer than 15 employees are not covered by ADA provisions) larger businesses willing to make these changes could see incentives come tax time.

The ultimate impact of the proposed changes outlined is difficult to determine amid the uncertainty involved on what changes will actually be passed into law. A key factor will be the results of the senate run-off race in Georgia where Democrats need to win 2 seats in order to have equal footing in the senate. If the Republican Party remains in control of the senate, it will be very difficult for Biden’s proposed changes to get passed into law. Lastly, the earliest that any of these measures may take effect is 2021.

Yann Reichelt is a CPA and currently works as a Manager for the Business Assurance and Advisory at Keiter. He joined the TSAG team in 2020 and works collaboratively with Jonathan Spencer and Scott Eckert in various markets throughout the US. Yann brings over a decade worth of experience in accounting to the TSAG team. If you have further questions about how the Biden tax plan affects your self-storage asset, please reach out to Yann directly at [email protected].

November 2, 2020

TSAG Market Analysis: Northern NJ

By: The Storage Acquisition Group

Dusk Falls On The Urban Downtown Metro Area Of Newark New Jersey

Some consider northern New Jersey a mere “drive-thru” area as they travel by car between New York City and Washington D.C. But to others, particularly those in the self-storage industry, northern New Jersey is a lush region of the Garden State – with a dense population, the third highest median household income in the country, a high concentration of multifamily dwellings, and close proximity to the nation’s largest metropolis, New York City.

“It’s mostly bedroom communities, not a drive-thru area,” says Richard Monteforte, chief operating officer and an owner of American Self Storage in New Jersey. “It’s a great self-storage market in a great state.”

And it’s considered to be a largely underserved self-storage market, with a penetration rate of 4 square feet of self-storage space per capita, well below the national average of 5.8 square feet per capita, according to data from Radius Plus, a self-storage data analytics and research firm.

Like other markets across the country, northern New Jersey, with its mix of gritty urban cities and affluent suburban towns, has definitely seen its share of new self-storage facilities coming on line in recent years, mostly the result of conversions and in-fill projects.

The cities of Newark, Paterson, and Elizabeth, all tucked close together just southwest of Manhattan, saw a combined 5 percent increase (or 632,000 square feet) in deliveries of new self-storage space in 2018, an 8 percent jump (986,000 square feet) in 2019 and a 6 percent increase (734,000 square feet) so far in 2020, according to Radius Plus. There is an additional 10 percent of new supplies under construction in the immediate Newark/Paterson/Elizabeth area alone, according to data.

Cory Sylvester, a principal at Radius Plus, says the numbers clearly show northern New Jersey has one of the higher new-construction rates in the nation. But the “supply has been added in pockets,” such as in southern Paterson, where new self-storage space has increased 35 percent in recent years and sent rental prices downward by 15 percent, Sylvester says. Meanwhile, many parts of the region have seen little new supply in recent years.

Overall, the demand for self-storage space remains strong in northern New Jersey, precisely because of the relatively low number of self-storage facilities serving the densely populated area of the Garden State. In addition, the entire New York metropolitan area, which includes parts of northern New Jersey, has a penetration rate of only 2.95 square feet per capita – and urban residents need self-storage space somewhere.

The bottom line: Northern New Jersey’s self-storage industry is a beneficiary of the general lack of supply in the entire New York metropolitan region – and it’s an area capable of sustaining a surge in new supplies and yet rebounding within a relatively short time, Sylvester and other industry officials say.

In addition, northern New Jersey’s population is growing, especially since the onset of the coronavirus pandemic, as residents in New York City leave the city in droves for more suburban/country settings as COVID-19 rages in urban areas.

“We’ve seen a big exodus out of New York City,” says Phil O’Hara, head of operations at Delta Self Storage, which owns two facilities in northern New Jersey and one in New York City. “It’s been good for New Jersey (self-storage) operators. There’s still plenty of demand out there.”

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Before the pandemic hit the nation last March, self-storage prices in northern New Jersey were largely flat, a relatively encouraging phenomenon in a region that’s seen a solid increase in supplies. Over the past 12 months, prices have been running in the $140 to $165 range for 10-foot-by-10-foot climate-controlled units in the general region, according to Radius Plus data.

“It is a great market,” Bill Sitar, New Jersey advisor for Storage Acquisition Group, says of New Jersey in general. “It’s the most densely populated state in the nation and has among the highest per capita income as well. We have the third busiest port in the country and are located in between NY and Philly/DC.”

He added e-commerce wants to be in northern New Jersey precisely because of its convenient proximity to so many major U.S. metropolitan markets. Even northern New Jersey’s minuses are considered pluses. The entire state is viewed as a “high-barrier” region, with tough zoning laws and expensive real estate, making it difficult for developers to build new facilities and for investors to buy existing properties.

Yet those high-barriers act to protect existing self-storage operators, said American Self Storage’s Monteforte, who has been active over the years in the New Jersey Self Storage Association.

“At association meetings of self-storage (operators), I used to tell people, ‘You’ll never see a happier bunch of guys’ because we were in a great industry in a great state,” says Monteforte.

Says Storage Acquisition Group’s Sitar: “You are going to be paying top dollar for assets in this market and the sellers are very sophisticated. Additionally, with much access to capital deals are very competitive.”

Nicolas Malagisi, national director of self-storage at SVN Commercial Real Estate Advisors, says the recent pandemic was initially hard on some New Jersey’s self-storage operators, due to strict emergency social-distancing and lockdown rules.

“But business is largely back to normal,” he said. “It’s proved to be a very resilient market. I’m very optimistic about it across the board. It’s a good market.”

Radius Plus’s Sylvester agrees the future looks bright for northern New Jersey’s self-storage sector, ticking off its proximity to New York City, its high median income and its dense population. “There’s so much going for it,” he said.

Northern New Jersey At A Glance (Newark, Paterson and Elizabeth areas)

Combined Population	557,7000
2019 New Deliveries	986,000 (8% Increase)
New Facilities Under Construction	10% Increase
Rental Rate 10×10 CC	$140-$165 per month
Square Feet/Capita	4

Note: Data from Radius+

The Storage Acquisition Group specializes in purchasing storage facilities and portfolios nationwide. Uniquely, we allow owners to sell direct without having to list their facility. With our 4-tiered approach, Market Analysis, Acquisitions, Underwriting, & Closing Support, The Storage Acquisition Group is able to help owners navigate a simple sales process while netting the highest possible profit.

October 21, 2020October 21, 2020

Extra Space Storage – Atlanta, GA

By: The Storage Acquisition Group

The Storage Acquisition Group (TSAG) is pleased to announce the closing of Extra Space in Snellville, Georgia. The facility is located at 3220 Centerville Hwy on 10.8 acres with 14 buildings and 823 units across 94,954 net rentable square feet. The facility offers both climate and non-climate controlled space with an additional 110 spaces and 50,000 SFof uncovered outdoor parking.

David Spencer, Vice President and Senior Advisor with The Storage Acquisition Group and agent at Keller Williams Commercial in Atlanta, GA, and TSAG CEO & President Cowles M. “Monty” Spencer, Jr. negotiated the transaction.

The Storage Acquisition Group specializes in purchasing storage facilities and portfolios nationwide. Uniquely they allow owners to sell direct without having to list their facility. With their 4-tiered approach, Market Analysis, Acquisitions, Underwriting, & Closing Support, The Storage Acquisition Group is able to help owners navigate a simple sales process while netting the highest possible profit.

October 1, 2020

TSAG Market Analysis: Washington DC & Baltimore

By: The Storage Acquisition Group

Separated by only 40 miles, Washington D.C. and Baltimore are often considered by the media and other industries as one giant metropolitan area.

If so, it’s definitely a tale of two cities within the D.C.-Baltimore market. When it comes to the self-storage industry, D.C. is continuing to see a strong increase in supply while Baltimore is seeing a distinct slowdown in new construction, industry officials say.

“They’re really different markets with an overlap in the middle,” says Gaby Sader, a partner and executive vice president of Boardwalk Storage Solutions, a facilities builder for investors in the D.C-Baltimore region.

For the immediate District of Columbia area, the self-storage market is seeing little let-up in investor interest, with new construction underway that would expand its overall supply by 6.7 percent, says Cory Sylvester, a principal at Union Realtime, the data analytics and research firm that closely tracks self-storage across the nation through its branded Radius Plus platform.

According to Radius Plus, the D.C. area – which includes the suburbs of Northern Virginia and parts of southern Maryland – has experienced a three-year growth in the supply of 15.5 percent.

“That’s definitely high growth,” said Sylvester. “Washington has been going strong now for a while.” New construction has been particularly intense in the core city, less so (though still strong) in the outlying suburbs.

The overall new supply has definitely had an impact on rental activity in recent years in the D.C. area, with prices falling from the $160 range for 10-foot-by-10-foot climate-controlled units in September 2017 to $145 in February 2020, just prior to the coronavirus outbreak and national economic downturn, according to Radius Plus data.

“D.C. self-storage has definitely been overbuilt,” says Todd Manganaro, chief executive of ezStorage and president of the Maryland Self-Storage Association. ezStorage owns about 50 self-storage facilities in the D.C.-Baltimore area.

Prices in the nation’s capital sank to as low as $125 this past spring during the depths of the pandemic in the Northeast, but they’ve since bounced back to about $165, according to Radius Plus. The reason: D.C. is a dynamic, growing city with a solid federal-government employment base and an expanding high-tech sector, industry officials say.

Despite all the recent new construction, the area’s so-called “penetration rate” – or the square feet of self-storage space per capita – remains at about 5.13, below the national rate of 5.8 percent.

And that and other factors make D.C. an attractive market for investors.

“The population continues to grow and incomes continue to climb,” says Monty Spencer, CEO of Storage Acquisition Group in Yorktown, Virginia. “D.C. and the surrounding metro areas are very sought after environment to live and work and prices for residential real estate are very high in the district, which leads to fantastic long-term stabilization and rent growth.”

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D.C.’s negatives? High real estate taxes and sometimes difficult zoning restrictions, Spencer and others say.

As for the considerably smaller Baltimore area, its image has been banged up in recent years, with the city portrayed as a virtual social-and-criminal basket case in TV dramas such as HBO’s “The Wire.”

But Chris Brandaleone, chief executive of RightAway Storage, said the impoverished image of Baltimore’s is unfair. The city actually has a large population of young professionals living in upscale and renovated multifamily buildings – and they tend to be transient professionals who often need self-storage space.

Indeed, the economic data back up Brandaleone’s assertion of Baltimore being a stronger and more dynamic market than portrayed in the media. As for self-storage space, the city saw a 14.6 percent increase in supply over the past three years, according to Radius Plus data. The Baltimore area’s penetration rate is 5.27 percent, also below the national average.

Yet recent new construction has definitely taken its toll in the Baltimore area, with prices for climate-controlled units falling from about $135 per month in September 2016 to $120 just prior to the coronavirus outbreak in March. Prices plunged this spring to around $105 per unit, but have since rebounded to about $130 as of mid-September, according to Radius + data.

Meanwhile, building has recently ground to a virtual halt in the Baltimore area, with new construction underway expected to add only 0.9 percent to the Baltimore area’s overall self-storage supply, according to Radius Plus.

All in all, Storage Acquisition Group’s Spencer said the Baltimore area’s dense population and location smack in the middle of the Eastern seaboard leaves it “well-positioned to weather short-term volatility and provide long term stable returns to investors.”

Like the District of Columbia, one of Baltimore’s greatest drawbacks is its high real estate taxes, Spencer says.

RightAway’s Brandaleone agrees that the long-term fundamentals for the Baltimore area are strong. Indeed, his firm is currently building a new 110,000-square-foot facility in Baltimore County, just outside of the city.

The lease-up period for the facility may take longer than hoped and expected, but it will be worth it in the long run, said Brandaleone.

Noah Mehrkam, chief executive of Self Storage Plus, which manages 42 facilities in the general D.C.-Baltimore market, said both cities, and their surrounding suburbs, have seen overbuilding in recent years.

Still, Mehrkam, whose company also develops self-storage facilities, said both D.C. and Baltimore remain attractive for investors – as long as they’re careful and patient.

“It’s harder to find good sites these days, compared to seven or eight years ago,” he said. “But we’re going to keep looking for good micro-markets. You have to be prepared for the long-term slog.”

The Storage Acquisition Group’s CEO, Spencer agrees stating “We are very actively seeking institutional-grade investment opportunities in each market.”

Self-storage Markets at a Glance:

Washington, D.C. Metropolitan Area

Square Feet of Space	26.9 Million
Number of Facilities	454
Population	6.1 Million
Penetration Rate	5.13
New Supply Increase in Pipeline	15.5%

Baltimore Metropolitan Area

Square Feet of Space	12.9 Million
Number of Facilities	213
Population	2.9 Million
Penetration Rate	5.27
New Supply Increase in Pipeline	14.6%

Note: Data from Radius+

September 28, 2020September 28, 2020

Excessive Supply: Compressed Rental Rates & Extended Lease-up Time

By: Monty Spencer, CEO, Senior Advisor

A developer builds a new storage facility in a hot market, but it takes longer than expected to lease up causing rental prices to be lowered and the property value to drop.

What happened? Typically, the challenge is due to: Lack of Due Diligence. The failure to properly drill down into market data can cause a seemingly good investment to become an unprofitable one. Excessive-supply problems have cropped up across the country leading to slower lease-ups, compressed rental rates, and lower property valuations.

Besides an immediate drop in operating income, excessive supply impacts CAP rates for property owners in oversupplied markets. Oversupply can hurt everyone in a given market – not just developers of new facilities — and it’s important to recognize the signs and stages of how this unfolds. A reckoning is occurring in many over-developed markets and will continue as long as developers don’t recognize the warning signs.

I want to stress:

Not all oversupplied markets are the same.

The Atlanta market, for instance, has seen a 14% increase in self-storage supply over the past three years, a major jump that should raise alarm bells for new-construction developers. Yet, the Atlanta area is a dynamic, fast-growing region that can absorb new supply more readily than other markets.

The Philadelphia area has seen an 18.5% increase in supply over the past three years and its population isn’t growing nearly as fast as Atlanta’s population. Yet, Philadelphia’s self-storage penetration rate – or the square feet of space per capita – is much lower than the national average, and therefore it can absorb some new supplies in certain areas.

Still, other markets, such as Charleston, S.C. (25% supply growth over three years in an already overbuilt market), have seen a flat-out frenzy of development and in many cases, the developers have completely ignored the market dynamics which clearly suggested that new projects would face significant headwinds to reach full stabilization and full market rent.

These developers usually go through stages of denial:

— ‘It won’t happen to me’ – Developers who at the outset hope that their new property will be an outlier and not be affected by the market dynamics which are obvious from the inception of a project. They’re almost invariably proven wrong in the end.

— ‘I can always sell at pre-construction proformas’ – This often happens soon after a developer starts to nervously realize a new facility is yielding less cash flow than estimated – and thinks another investor will ride to the rescue and buy at estimated pre-construction levels.

— ‘I’ll stick it out’ –Many developers who stubbornly hold to the belief that the new normal is not applicable to them and stick it out for quite a while. But even when a facility reaches 80% or higher occupancy, it still doesn’t translate to an expected cash flow — due to slashed rental rates — that will provide a purchaser the income needed to justify an asking price.

Sometimes, the only hope for these developers is that a city or town will place a moratorium on new construction, capping overall supply while demand catches up. Understanding a market is more than believing you know the outcome of a development. While being familiar with the market you are developing is helpful, financially successful developments typically combine local knowledge with a comprehensive market study to determine the viability of each project. Researching, analyzing, and understanding the empirical data is the only successful approach.

Cowles M. “Monty” Spencer, Jr. serves as The Storage Acquisition Group’s President & CEO. Monty is an accomplished real estate executive with over 20 years of commercial real estate experience. He has won numerous CoStar® Power Broker of the Year and Commercial Real Estate Council Awards, as well as winning the Deal of the Year Award & Broker of the Year Awards for three consecutive years. Distinguished throughout the industry for developing dozens of high-profile retail projects, Monty has brought his unique blend of expertise and ambition to spearheading The Storage Acquisition Group. He received his BA from the University of Mississippi in Business Administration & Marketing.

August 24, 2020

TSAG Market Analysis: Philadelphia

By: The Storage Acquisition Group

The relatively stable Philadelphia-area self-storage market could be in for some turbulence soon due to an expected influx of new facilities into the region, according to data from a leading industry research firm.

Not all areas of the Philadelphia metropolitan area – which includes southeastern Pennsylvania, southwestern New Jersey and parts of northern Delaware – are seeing a sharp uptick in new supplies of self-storage facilities.

But downtown Philadelphia and other parts of the city now have approximately 50 percent more self-storage space either in the planning or construction stage, meaning the region’s overall growth of new supplies could spike by 18.5 percent, according to data from Radius +, the research and data analytics arm of Union Realtime, which closely tracks self-storage across the nation.

Existing facilities in the City of Brotherly Love will undoubtedly feel the impact of new facilities, which traditionally offer bargain prices in order to gain market share when they first open. The question is how much of a price ripple effect will be felt in outlying areas as a result of the new supplies.

“Some areas are going to experience some pain” says Cory Sylvester, principal at Radius +. “Rental prices will be under pressure for a few years.”

“The supply has definitely increased in south Philadelphia,” says Dan White, operations manager at Argus Properties Management, which manages nine self-storage facilities in the region, five of them within Philadelphia itself and two on the city’s outskirts.

“It’s hard to say how much more the market can take in terms of new supplies,” said White, who also serves on the board of directors of the Pennsylvania Self-Storage Association.

But White and other industry officials remain bullish in general on the Philadelphia metropolitan market, saying it’s a dynamic and densely populated area that can withstand the short-term influx of new supplies.

Indeed, the region’s overall storage penetration rate – or the number of square feet of self-storage space per capita – currently stands at 3.9, compared to the national rate of 5.8, according to Radius + data.

That relatively low figure may partly explain the interest of investors to build in the area. The region’s prices have also been attractive to developers.

In August 2019, rental prices for a 10-foot-by-10-foot climate-controlled unit hovered in the $155 range, with non-climate-control units fetching in the $130 range, according to Radius + data.

Regional prices dipped this past spring due to the coronavirus lockdowns, but prices have since nearly rebounded for climate-controlled unit to about $145 in the first half of August. Prices for non-climate-controlled units have fully rebounded to their immediate pre-virus levels.

Indeed, regional prices for both climate-controlled and non-climate-controlled units are currently hovering at their approximate August 2017 levels, an indication of how stable the overall Philadelphia-area market has been over recent years, according to Radius + data.

In all, the Philadelphia area has “strong supply-demand fundamentals” that make it an attractive market for investors, says Monty Spencer, CEO of Storage Acquisition Group in Yorktown, Virginia.

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Some subsectors of the market may be seeing some overbuilding, but the market as a whole is solid, Spencer says.

There are specific pockets within the Philadelphia MSA that are considered a “high barrier” to enter, few owners are willing to sell, Spencer said. “It’s a difficult market to acquire institutional-grade assets,” he said.

Mike Moyer, the owner of Allentown-based Budget Store & Lock Self Storage, which owns 37 facilities in the region, agrees that it’s hard to find good properties to develop or buy in the region. “It’s like finding a needle in the haystack,” he says.

Outside the city proper, the self-storage market is seeing some new-construction activity, though not nearly as much as in the city of Philadelphia itself, says Moyer, president of the Pennsylvania Self-Storage Association.

“I wouldn’t say we’re extremely overbuilt,” says Moyer of outlying towns and cities near Philadelphia. “There’s been activity, but in general I would say it’s been stable.”

Despite the uncertainty this past spring due to the coronavirus outbreak, demand for self-storage space remains strong in the region — and the interest in buying and selling also remains steady, Moyer says.

Radius’s Sylvester agrees that outlying areas have seen only “moderate growth’ in inventory in recent years. “Many areas are doing just fine,” he said, adding that the southern New Jersey region is performing particularly well.

But he said there’s no escaping the fact that 58 new facilities are in the “pipeline stage” of development, potentially adding 4.5 million square feet to the region’s current 24.3 million square feet of self-storage space. Again, most of that new supply is in the city of Philadelphia itself, but price pressures will indeed build, he said.

The same phenomenon has happened in other markets around the country: A flood of new supplies temporarily driving prices down, followed by a pullback by investors and then a slow recovery back to old price levels. If that’s indeed in store for Philadelphia, then the long-term prospects for the region remain bright.

“We’re still very optimistic about Philadelphia – and not just the immediate metro market but the entire Metropolitan Statistical Area,” says Spencer of Storage Acquisition Group, noting the Camden, New Jersey area is also a “very attractive” area for investors.

Self-storage Markets at a Glance:

Philadelphia Metropolitan Area

Square Feet of Space	24.3 Million
Number of Facilities	452
Population	6.2 Million
Penetration Rate	3.9
New Supply Increase in Pipeline	18.5%

Note: Data from Radius+

July 28, 2020July 28, 2020

TSAG Market Analysis: The Carolinas

By: The Storage Acquisition Group

Aerial Of Downtown Charlotte, North Carolina, Usa

Due to the “extremely high” influx of new self-storage supply in recent years, the North Carolina and South Carolina storage markets can expect prices to remain low into the foreseeable future until the two-state region’s supply-and-demand imbalance stabilizes, according to industry experts.

North Carolina is already starting to see prices settle down after unprecedented supply growth over the past three years, including a 17.5 percent supply surge in the Charlotte area and a whopping 25.6 percent spike in the Raleigh-Durham area. Both rates are well above the national 10.8 percent growth rate during the same time period, according to Radius+, the data analytics and research firm that closely tracks self-storage across the nation.

With North Carolina’s population continuing to increase – and with Raleigh-Durham’s “Research Triangle” acting as a major generator of economic activity – the Tar Heel state should soon reach a stabilization point in prices, which have fallen anywhere from 25 to 35 percent for 10-by-10-foot climate-controlled units since 2016, according to Radius+ data.

“The prospects for Charlotte and other markets (in North Carolina) remain very strong,” says Cory Sylvester, a principal at Radius+. “The fundamentals are still there.”

Robert Kapp, president of American Self Storage in Raleigh, agrees that the new-construction frenzy has recently eased in North Carolina and prices are starting to stabilize. Kapp’s firm owns 10 facilities in North Carolina, stretching from Raleigh-Durham to the Charlotte area.

“It was sort of like a wild, wild west gold rush,” Kapp said of the recent overbuilding in North Carolina. “Some developers got their fingers smacked a little, so the new pioneers that were coming into the market are slowing up. Things are settling down.”

But South Carolina is a different story. Its recent building boom – including a 25 percent jump in self-storage supply in the Charleston area over the past three years – came a little later than the construction craze in North Carolina, according to data.

As a result, it may take a while longer, perhaps a few years, for the absorption of new supplies and for prices to stabilize in metro-markets such as Charleston and Greenville, industry experts say.

Any stabilization would be welcome in Charleston, where prices for 10-by-10 climate-controlled units fell by 27 percent from 2016 to 2019. Prices for non-climate-controlled units fell by 38 percent during the same time period, according to Radius+ data.

The ongoing coronavirus pandemic, and the ensuing economic downturn, has only exacerbated the pricing situation in Charleston, where prices for both climate-controlled and non-climate-controlled units were down in June by about $20 compared to the same period in 2019, according to data.

Part of that pandemic-era plunge is directly attributable to real estate investment trusts (REITs) slashing their street rates in order to gain market share, a phenomenon that’s happened in other markets around the country, Sylvester says

“They’ve really gotten whacked,” Sylvester says of Charleston self-storage operators in general.

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Kevin Leebrick, head of My Storage Ops, which owns five self-storage facilities and manages others across the Carolinas, says South Carolina has been “hit a little harder than North Carolina” due to the state being “awash in new supply.”

Why the surge in new supply in South Carolina? Besides the fact, the area is doing well economically (the pandemic downturn aside), South Carolina was actually underserved for years in self-storage facilities, thus attracting hungry investors determined to develop as fast as possible, says Leebrick.

“Investors have discovered South Carolina,” says Leebrick, a member of both the South Carolina and North Carolina self-storage associations.

Today, South Carolina’s major submarkets are anything but underserved.

Charlestown’s self-storage penetration rate – or the number of self-storage square feet per capita – stood at 8.1 in June, compared to the national average of 5.8 square feet per capita. Greenville’s penetration rate was 7.5 in June.

By comparison, Charlotte’s penetration rate stood at 6.6 in late June, while Raleigh’s hovered around 7.2.

“It’s going to take a while to absorb all the new supply” in South Carolina, says Leebrick.

But industry officials stress that, in the short-term, there are still attractive pockets of opportunities for investors in both states, particularly in North Carolina.

Monty Spencer, CEO of Storage Acquisition Group in Yorktown, Virginia, says the best investment opportunities always come down to the “neighborhood market,” not the broad-brush state markets.

In North Carolina, Spencer says some areas around Charlotte and Wilmington remain interesting prospects for investors, while the Raleigh-Durham area remains more tenuous.

In South Carolina, the situation is similar – some submarkets are more attractive than others. The Hilton Head and coastal areas in general remain strong markets for investors, especially if individual towns have high-barriers to entry, such as zoning restrictions.

By comparison, the Charleston and Columbia areas are not nearly as attractive due to recent overbuilding, Spencer says.

“You have to be a little more careful in those areas that have seen overbuilding,” says Spencer.

Radius+’s Sylvester says both North Carolina and South Carolina should rebound from past overbuilding, as their populations and economies grow and create move demand for self-storage.

“They’ve both seen massive increases” in supply, he said. “But ultimately their population growth over time can keep up with the supply growth. It will just take some time.”

Self-storage Markets at a Glance:

	Charlotte, NC	Raleigh, NC	Charleston, SC
Square Feet of Space	17.3 million	9.9 million	6.4 million
Number of Facilities	401	202	134
Population	2.6 million	1.3 million	798,000
Penetration Rate	6.6	7.2	8.1
3-Year Growth Rate (Supply)	17.5%	26.5%	25%

Note: Data from Radius+

July 20, 2020July 20, 2020

Repurposing Vacant Retail: Via Conversion to Self-Storage

Repurposing Vacant Retail via Conversion to Self-Storage

By: Dan Cromwell, CCIM, Senior Advisor

Kahului, Maui – October 2018: Our direct flight touches down at 11:30 AM HST, Kahului Airport (OGG), 5:32 hours after takeoff from Los Angeles International Airport (LAX). The start of our semiannual visit to our condo in Kaanapali is officially underway as we shift gears into muscle memory: the Mrs. picks up the rental car while I collect my golf clubs and other checked baggage. We load up the rental car and head to our first stop at Costco, where we pick up the basics for the next week. Next stop, the adjacent K-Mart for our non-bulk items – or so we thought…

Instead, we were greeted by an impressive storefront for the very first U-Haul full-service facility on the Valley Isle. Make no mistake, this is a highly visible, “First & Main” retail location that was home to a very successful K-Mart for the previous 24 years, not some converted warehouse in a nearby industrial district. U-Haul’s parent company, Amerco Real Estate Co., purchased the site for $26.8 million on Oct. 17, 2017, from 424 Dairy Road LLC, a company of Hendricks Commercial Properties of Beloit, Wis., according to county property tax and state business records. Factored against the 107,520 sq. ft. store footprint, this represents a price per sq. ft. of nearly $250/sq. ft. It is worth noting that the building sits on 7.3 acres of fee simple land that should attract interest from pad users, especially quick-serve & drive-thru dining options.

*The acquisition of the Kahului facility was driven by U-Haul Company’s Corporate Sustainability initiatives: U-Haul supports infill developments to help local communities lower their carbon footprint. Their adaptive reuse of existing buildings reduces the amount of energy and resources required for new-construction materials and helps cities reduce their unwanted inventory of unused buildings.

By repurposing the former Kmart, U-Haul prevented the use of 360 tons of metal manufacturing and transportation (the same amount of steel used to make 363 passenger cars); avoided 5,730 tons of new concrete pours (enough to create 116 miles of concrete blocks); kept 6,237 tons of construction and demolition debris out of landfills (avoiding 240 dump trucks traveling 5,038 miles in total); and stopped 3,759,443 pounds of greenhouse gas emissions from entering the atmosphere (the same carbon emissions of 288 large SUVs or pickup trucks for one year).

In addition to the remarkable benefits resulting in a reduced carbon footprint as demonstrated in the Kahului K-Mart example, I see these conversions as a viable, stand-alone business model for the following reasons:

Proven track record with the previous retailers within in-fill retail locations surrounded by established communities with a (presumably) built-in customer base.
Excellent visibility on a high-traffic retail corridor providing consistent signage reminders for potential customers along with a strong long-term branding opportunity.
Faster delivery than “ground-up” developments with drastically reduced pre-development costs due to the elimination of site engineering and site preparation work.
Reduced “cost-of-market-entry” expenses due to the existence of a building shell – note that most big box stores have the volume (ceiling height) necessary to support a mezzanine level.

Needless to say, there are also a number of challenges facing a conversion from retail to self-storage, including the following examples:

Current zoning does not allow for self-storage. This can often be overcome by obtaining a conditional use permit (CUP) that expands allowable uses to specifically include self-storage.
Government officials clinging to the hope that the vacant store can attract another retail use so the City can continue to receive sales tax, the lifeblood of many community’s source of income. This false hope often wears thin as the months pass and the negative impact of a high-profile vacant storefront outweighs the harsh reality that there just isn’t another retail user on the horizon, especially if/when the property becomes the target for graffiti taggers.
NIMBYs – there seems to be prevailing concerns shared by neighboring property owners that the storage facility will generate excess traffic with illegal dumping on nearby sites. These objections can be offset by the fact that the previous retail user-generated more traffic than most self-storage users would create and the on-site security could actually thwart any illegal dumping.
Unrealistic pricing that doesn’t support a conversion. If the seller adamantly holds out for a “retail” sale price, it won’t pencil out for conversion. Ideally, a developer will be able to purchase the shell for an amount well below the replacement cost.
Inadequate load capacity. A fundamental rule-of-thumb for storage facilities is a load rating of 125 lbs/sq. ft. Unless the previous retail use was a warehouse club like Costco or Sam’s Club, this could prove to be a dealbreaker if the cost of retrofitting the foundation throws the overall conversion budget out of synch. Ideally, the current owner is able to produce the engineered drawings for the facility; otherwise, an “as-built” inspection/calculation will be necessary before proceeding with an acquisition.

The identification and qualification process should adhere to the same rigorous analysis that one would employ in any site selection assignment in order to understand the underlying site characteristics.

What are the underlying demographics in the trade area?
Are these numbers static or is the trade area in a state of transition?
What about psychographics (tapestry segmentation) – is the make-up of the populace conducive to developing a successful self-storage facility?
Is the subject building an isolated vacancy or is the overall retail trade area in a state of decline?
What is the competition, both in terms of existing self-storage facilities and other potential uses imagined by other prospective buyers?

In closing, as the pace of store closings picks up as a result of the impact caused by COVID-19 restrictions, there should be ample opportunities to acquire well-positioned assets priced well below replacement costs. Combined with reduced interest/competition from existing retailers looking to expand, this may be an ideal time for self-storage operators to consider the upside(s) of a campaign focused on conversion from retail to self-storage.

*Taken directly from U-Haul’s corporate website.

Dan brings decades of experience in nearly every component of the CRE to TSAG. He has expertise in economic incentive negotiations, site selection & evaluation, tax increment financing, public/private partnerships, entitlements, acquisitions, dispositions, strategic planning, development services, investment/financial analysis, centroid, and roll-out studies.

June 26, 2020July 28, 2020

TSAG Market Analysis: Atlanta

By: The Storage Acquisition Group

Atlanta, Georgia, Usa Downtown Skyline Aerial

Atlanta’s self-storage market is expected to rebound just nicely, thank you

It may take a few more years for self-storage prices to stabilize in the Atlanta area due to recent overbuilding and rate hits caused by a mini-price war during the early stages of the coronavirus outbreak, industry officials say.

Still, industry experts remain bullish on the Atlanta market long-term, saying the region’s population and economy are expected to grow in the coming years and create yet more demand for self-storage facilities.

“It’s a very solid market long-term,” says Cory Sylvester, a principal at Radius+ the data analytics and research firm that closely tracks self-storage across the nation. “Atlanta will rebound.”

Industry officials are optimistic about Atlanta’s future for the very same reasons that caused its current problems in the first place: It’s a hot metropolitan area that self-storage operators and developers want to mine to its fullest.

And mine it, they have, in recent years to the tune of a 14 percent increase in the region’s supply of self-storage space over the past three years, bringing the Atlanta market’s total self-storage supply to about 41 million square feet, according to Radius+ data.

Not surprisingly, the supply spike has led to price pressures, causing rates for 10-foot-by-10-foot climate-controlled units to fall from the $130 range in the winter of 2019 to the $110 to $115 range this past winter, before the COVID-19 crisis hit across the country, according to Radius + data. The coronavirus outbreak – and subsequent economic downturn – knocked another $5 to $10 off of individual unit rentals in the Atlanta market, data suggests.

“It was a double whammy,” Calvin Byrd, CFO of Byrd’s Mini Storage in Dawsonville, Georgia, about an hour north of Atlanta, said of both supply and pandemic price pressures. “Some areas of the region have been harder hit than others.”

Byrd, who is president of the Georgia Self-Storage Association and whose company owns 12 facilities in Georgia, stressed that the oversupply problem is limited to certain areas of the Atlanta region, not all areas.

For instance, a handful of new self-storage facilities have popped up near one of his firm’s centers, causing prices to fall in recent years, Byrd said.

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And the new rivals were not national real estate investment trusts (REITs), but rather local competitors trying to take advantage of the investment popularity of self-storage facilities in recent years, Byrd said.

“Most of them are first-time builders,” Byrd said. “They’re attracted to the (industry’s) positive vibes and low-interest rates.”

Raj Sheth, CEO of Boardwalk Storage, owner of eight facilities in Georgia, agrees that oversupply problems and subsequent price pressures all depend on where you are in the Atlanta area.

In and around the city of Cumming, just north of Atlanta, five new self-storage facilities have opened over the past four years alone, driving down monthly prices from as high as $160 to as low as $70, Sheth said.

“And that’s just one example,” Sheth said. “It’s all tied to overbuilding. It’s a pattern you see in other cities. In some ways, it’s a bit like the oil industry, where the prices get to a certain high point, then the frackers come out. The same thing happens in self-storage.”

But the surprising thing about Atlanta is that it’s penetration rate – or the number of self-storage square feet per capita – is not completely out of whack with the rest of the nation.

According to market data, Atlanta’s penetration rate is just over 8 square feet per capita, compared to the national average of about 7 square feet per capita.

Meanwhile, Atlanta’s 7.5 percent projected growth in supplies – counting both under-construction and planned facilities — is in approximate line with national supply-growth rates, Radius+ data shows.

The problem is that Atlanta’s recent new supply came rushing in all at the same time, forcing year-over-year price cuts of 8 percent for non-climate-controlled units and 12 percent for climate-controlled units in May, according to Radius+ data.

Cory Sylvester, with Radius+ said “Atlanta may seem to be struggling, but it’s fairing well compared to other hot major markets, such as Las Vegas and Orlando.”

And with Atlanta’s expected continued growth in population and jobs, the prospects still look bright for self-storage in the region, Sylvester said.

“I remain long-term bullish on Atlanta,” he said.

Brooks Lumpkin, the owner of Southeast Storage in Atlanta, said self-storage developers and owners in the region just have to accept there’s a cycle to the market: As Atlanta’s population and self-storage demand rise, developers start building until prices start to deflate, then they retreat until prices stabilize, only to start building again.

“You have to assume that more supply will be coming at some point,” said Lumpkin, whose company owns two facilities in the Atlanta area. “You have to be strategic when (you build or buy facilities) and just be prepared for new competition.”

As of now, the Atlanta metropolitan area is expected to grow at an annual 2 percent to 3 percent rate, with each percentage point equaling about 70,000 people – and that means a lot more demand is on the way, assuming population and economic trends continue, said Lumpkin, a member of the Georgia Self-Storage Association’s board of directors.

It will take a few more years to fill up the new supply of self-storage space that’s come online in recent years in Atlanta, said Lumpkin. But the population and demand will also continue to grow – and once again create a need for more space in Atlanta, he stressed.

“I expect long-term positive growth,” Lumpkin said. “It’s an attractive industry in an attractive market.”

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June 26, 2020

Understanding Property Taxes in Self Storage

By: Bill Sitar, Jr. Esq., Vice President & Senior Advisor

Property Tax And Tax Return Word On Folders Stack With Label Black Binder On Paperwork Documents Summary Report In Busy Offices. Hr Human Resources Business Bookkeeping Accountancy Document Concept

Property taxes are a critical component to understanding the value of any real estate asset class, including self-storage.

Real property taxes are typically among the largest line item of expenses in a profit and loss statement. Managing your property taxes effectively is extremely important in a successful self-storage operation.

Being cognizant of the local tax appeal process is incumbent upon self-storage owners that desire effective management solutions for their properties. The most important aspect of the appeal process is initially understanding the critical dates in the process, such as filing deadlines, valuation dates, and appeal periods. Each jurisdiction has different deadlines. Typically, the burden of proof is on the taxpayer challenging the assessment of the property. This means that the taxpayer when challenging his or her property assessment before a local board or court must provide proof that the assessment is incorrect. That proof could come in many different forms including, but not limited to, comparable sales, an appraisal report, a property inspection report, an environmental report, and the like. In some jurisdictions, assessments change every single year. In some jurisdictions, the underlying ratios change every single year. In all instances, these assessments should be reviewed every single year for effective property management of your storage facility.

In most jurisdictions, when an appeal is filed the relief sought is only for the prospective year ahead and not for past years. In some jurisdictions, different boards hear different levels of cases and the taxpayer must be sure it is before the correct board. For example, in New Jersey, a property with an assessment below $1 million can be filed to the county tax board, in which the property is located. However, if the assessment is above $1 million, it may be filed directly to the Tax Court of New Jersey. Typically, a case filed before a county board will be heard faster with limited discovery and less sophistication. The higher courts are more sophisticated but do typically take a longer time, for case disposition.

Other concerns that taxpayers must recognize are that when appealing one’s tax assessment, often times the courts require that the taxes must be paid in full prior to the hearing being allowed to move forward. Additionally, some jurisdictions require annual income statements to be filed with the local municipality, regarding a property’s economic performance, in order for the appeal to proceed.

When looking at valuation, most self-storage facilities will be valued by either the income approach or the sales comparison approach. The income approach utilizes a property’s income less operating expenses and a vacancy rate to derive a net operating income. Thereafter, a capitalization rate is applied to the net operating income to determine the property’s overall value. Under the sales comparison approach, closed transactions of similar properties are analyzed and adjusted for various factors, such as location, size, and timing. Thereafter, the adjusted sales prices are analyzed to determine the overall value.

The biggest takeaway regarding property tax management is that every single year prior to the filing deadline, a property tax review should be made. Necessary to this process, the owner should review the most recent tax bill, the current rent roll, and income and expense statements of the last 3 years. If an appeal is warranted, make sure it is filed before the annual deadline in your jurisdiction!

If you have completed the research in your market and are now in need of reporting information to appeal your taxes, you can reach out to a self-storage specialist to run the necessary reports. Our company works with self-storage owners and provides complimentary reporting on sales comps, rent comps, etc. and is able to help calculate your cap rate.

Bill joined The Storage Acquisition Group in 2016. As the Vice President of Sitar Realty Company & TSAG, he brings a wealth of knowledge to the group. Bill’s diverse background in real estate brokerage, legal services, development, and the financial sector enables him to provide comprehensive solutions during the acquisition process. In addition to being a licensed New Jersey real estate salesperson, Bill has a law license in both New Jersey and Pennsylvania.