Everyone likes to talk about giant storage deals because they associate size with “sexiness”. However, the truth is that many of those big deals are total failures and there’s nothing attractive about losing money. Instead, for many investors in self-storage, smaller deals offer greater safety and financial returns. In this Self-Storage University podcast we’re going to explore why smaller deals are often a better choice.
Episode 107: Why Smaller Deals Are A Whole Lot Safer Transcript
If you read a lot of articles on the internet you would think that size is all that matters with self-storage facilities because all of your large rates a lot of your other large players all they want to crow about is how gigantic their self-storage facility is. But behind the scenes on those large self-storage facilities is often a tale of woe. Missed budgets on occupancy missed budgets on rental rates expenses greater than they originally thought and financial returns much much lower perhaps even negative. This is Frank Rolfe, the Self-Storage University Podcast. We're gonna talk about why small self-storage facilities are often superior to the big ones. Now there's two reasons for this. First reason diversity. When you have one giant self-storage facility you have all your eggs in one basket. If that market disappoints you because of issues with employment or other reasons then what are you to do? You've got this giant asset or perhaps liability and you're stuck there staring at it and you're not hitting any of your targets and there's not a darn thing you can do about it. But if you have portfolio balance then instead what can happen is you've got not just one giant asset but several smaller ones.
And these several smaller ones then gives you some diversity. If one's market isn't doing as well as you would hope it's okay it's offset by another. It's the same reason that we tend to buy stocks as opposed to buying a single stock into a bag of stocks you might even buy shares in the entire S&P 500 as a way to invest in the greater market and not be so reliant on a single issuance so that's the first reason why going small makes sense. But another reason that many people don't think about is trying to avoid lending problems. Because here's how that works. If I buy a smaller self-storage facility I may be able to finance it through what is called seller financing or seller carry. So I don't have to go down and get a bank loan because the seller is the bank and that's great. When the seller is the bank you get off on a lower down payment definitely a lower interest rate so it's just a happier situation you don't have any of the costs of the loan or the legal costs or the third party reports.
But you can't get seller financing typically on those larger more sophisticated deals. Also on a smaller deal you can reach out to local banks. Banks with maybe just one branch or two branch right in your market they know the area well and they're just as pleasant off to get the loan from as the mom and pop because they are at the end of the day the same as mom and pop. They're just mom and pop banks. Typically owned by one family or a few individuals. They operate pretty much the same. Even though they fall under the umbrella of the national banking laws they kind of do things their own way make decisions independently and that's great. But the problem you have with big storage deals at this moment in history is you're heading into what is called the Commercial real estate lending apocalypse. What that is is that there is $2 trillion of commercial debt coming to you this year and next and most of it is upside down. Most of it is in fact going to be a loss. We all know why we know that office buildings are sitting empty across America and we know that no one rents space in shopping malls anymore.
Every shopping mall that I go in is typically 50-60% occupied. So all it takes is a little bit of vacancy and a little bit of rents missing budget to put those properties in jeopardy. But in fact across America it's more than a little bit of a mess. It's gigantic. St. Louis office buildings are at about half occupancy right now for example the largest office building in St. Louis sold. It cost 100 million to build 30 years ago. It sold for $4 million on auction. It doesn't take many losses like that to drag down lenders so the problem is what happens with all that debt that has gone bad. Well what's gonna happen is it's going to push a lot of lenders out of the lending business. We just don't know how many or how soon? Because no one really knows where all of this commercial lending apocalypse debt is being held but we think a huge amount of it is being held by regional and national banks and it's definitely the kinds of lenders where those larger deals are financed. So that is a huge danger mechanism and another reason that small self-storage facilities are going to be the shining light in the dark sea of all kinds of storage problems going forward.
And remember these issues are just now coming to light. We're right now entering the phase of the commercial lending apocalypse we don't know where it ends we don't know the players we don't know the banks we don't know anything. All we know is that it's about to occur. So once again if you buy smaller self-storage properties you can often avoid all that. Now the industry has been focused for the longest time as far as all of the marketing and public relations focused on people like the largest brands such as public storage and as a result it's helped to shape more of people's opinions then when they go to buy something they say Oh I wanna be more like public storage but have you looked at the returns of those REITs those groups. They're not that impressive. So if you're trying to hit really high levels of return once again the smaller properties are superior so for those reasons when you go to buy a self-storage facility you start entertaining and looking at it and looking at the different deals there's nothing wrong with thinking small. In the end small they have the biggest returns.
This is Frank Rolfe, the Self-Storage University Podcast. Hope you enjoyed this. Talk to you again soon.