There is a general misconception that larger players dominate self-storage acquisitions and make it hard for smaller buyers to compete. While it is true that large players like Public Storage do own the largest facilities due to high cost and difficulty in obtaining debt for those properties, the truth is that smaller players definitely have the upper hand in the majority of storage purchases. Why is that?
The bulk of self-storage transactions are small
There are roughly 40,000 self-storage properties in the U.S. and by far the majority of these would be defined as “smaller”. A simple drive around any metropolitan area will hammer this point home. While every market has a quantity of giant, climate controlled, multi-story storage properties, the bulk of what you’ll see or smaller, single-story properties owned by moms and pops. It’s simply a numerical fact that probably 75% of all storage properties are more on the “smaller” side than the “larger”. Public Storage itself – the largest owner of storage in the world – only owns less than 2,000 facilities in the U.S. or roughly 5% of the U.S. total.
Mom-and-pop owners favor the smaller players
When a mom-and-pop owner goes to sell – and they control the vast majority of storage properties – they tend to favor buyers who they can identify with. We call this process “bonding” and it is much more powerful than just dollars and cents. Sellers like to think that there is more purpose to life than just money, and that by selling their property to someone they like it’s a win/win of both profit and helping the next generation. Larger buyers don’t have this appeal, as they can’t identify with them and they typically are just a cog in the machine with little passion about what they’re doing.
Smaller buyers have lower management costs
It’s a simple fact that smaller buyers have lower overhead costs – no costly offices and staff to support. This can be a major point of contention with mom-and-pop deals as they do not have sufficient cash flow to support the addition of a giant “overhead fee”. We have seen large buyers try to tack a standard “$100,000 management fee” plug number into each and every storage property they evaluate. Clearly, that renders many properties impossible to buy.
In structuring deals, smaller buyers are more creative
Big companies tend to have very formalized and structured limitations on what they can and can’t do when negotiating to buy a property. They tend to be governed by committee, and those committees have zero creativity. Let’s say that the seller wants a certain price that’s simply too high based on prevailing cap rates. The big company won’t buy it, but the smaller player may say “OK to hit that price you’ll have to carry the financing for 10 years at a below-market interest rate of 2%”. In fact, we have done twelve zero-down real estate deals over the past 25 years, and each and every one stemmed from marathon sessions of creativity. Big companies just don’t have that capability.
Smaller buyers are not carrying baggage
Let’s face it, the storage industry is in a moment of complete transformation right now. Americans are leaving urban cities and we can’t blame them. Between Covid and rioting (and the Great Resignation that has created an environment of fewer service job workers) there’s no big attraction in living shoulder-to-shoulder with strangers and waiting an hour to get seated. As affluent people flock to suburbs and exurbs, it has created a new playing field in which those areas are where the money is in self-storage investing. Sadly for the larger players, they are stuck with the bulk of their assets in those urban markets that nobody wants to live in anymore. This is not a fad but a megatrend, and people are probably never going back. You can make ten times more money in suburban and exurban storage investing than you ever could in the big city today. But larger players are stuck there and now have to deal with having overpaid and a tough lending market for years into the future. Smaller buyers do not carry this burden.
If your goal is to buy storage properties in suburban and exurban markets (where the smart money is going) then you will be buying from a mom-and-pop seller. And these sellers always favor the smaller buyer. As a result you can, and will, beat larger players on a regular basis.