2023 Report and Forward Outlook
After a brutal 2022 of searching for value-add opportunities with no success, we purchased 4 in 2023, all of which are performing well. Most notably, we made the shift from self-storage to class-b industrial mid-year and are happy with our decision to do so.
Recap & Asset Class Transition
Self-storage presented a point-in-time opportunity to capitalize on the lackadaisical approach owners had been taking to running their businesses, some market inefficiency, and we capitalized on it.
In early 2023, we purchased two self-storage facilities that offered such opportunity: we have driven revenues from $14k to $28k, and $7k to $13.5k, per month, at those facilities, respectively. Both, I believe, have room to run from there.
The bets we have made have been simple and relatively fool-proof: we increase rents and occupancy to market, that’s it. Market rents don’t have to grow throughout our markets for us to see success; with home sales declining, we didn’t feel that was a smart bet to make.
Unfortunately, by March 2023, we realized that we could not compete in self-storage acquisitions unless we bet heavily that rents would grow by 5-10% compounded annually, despite the slowdown in the housing / moving market. Even off-market, we were getting outbid by at least 40% on every storage property we offered on. It was time to find greener pastures.
Serendipitously, we stumbled into an asset class that we believed presented both a great opportunity to add-value via marking-to-market (like storage) and would also benefit from tailwinds like persistent high occupancies and rent growth (unlike storage).
Our “lightbulb moment” occurred when analyzing our call logs for the first property we acquired in 2023, a 229 unit storage facility in the Atlanta MSA. We found that our single 600 sqft “contractor garage” unit with power received more rental inquiries than the other 228 units at the facility combined. We discovered that the demand for small-bay industrial in these markets, in which it was no longer profitable or legal to build, was far greater than the supply available, and had caused a pricing dislocation much like we saw happen to self-storage between 2019 and 2021. We started our search in the immediate vicinity and soon acquired a 21k sqft class-b industrial property hosting 7 such contractor garage/light/shallow-bay industrial units just 1.5 miles away.
By the end of 2023, we had acquired two such properties in adjacent high-income markets in Atlanta. At the first, we experienced very strong inbound demand and achieved our first new lease for 4% above projections. At the second, we achieved our first new lease at 10% above projections. If we renew or replace all tenants at the rates we achieved on our first new leases, we should achieve yields on cost between 10-13% and net LP IRRs between 18 and 22% at each property. While we still have many below market leases to replace, we are encouraged by our early success and are near-exclusively pursuing properties like this between Charlotte, Greenville, Atlanta along the i85 corridor (my home turf).
2024 Outlook
In 2023, I was very confident that rental rates across the self-storage market would decline and that we’d see distress from the large REPE buyers as interest rates ballooned. I was right about the first, wrong about the second.
Simply put, there is no widespread distress. We are buying properties when people retire or from their heirs when they pass away, not from people who are opportunistic or facing a default.
The economy is strong, despite the Federal Reserve’s interest rate hikes. We have an incredible advantage as a growing, energy independent, and geographically secure country compared to the rest of the 1st world either facing invasion, energy shortages, or population decline. In particular, the Charlotte -> Atlanta corridor is booming as a destination for affordable, non-union labor, large ports, great weather, and low taxes - all of which are a boon for industrial demand.
Although we’re not making bets predicated on excessive market rent growth, we do believe that strong industrial demand in our markets will remain.
2023 was an incredible year for us acquisitions-wise, and while it will be tough to beat, I have confidence that the relationships we built and developed in the brokerage communities throughout our target markets will continue to bear fruit and help us land multiple strong value-add properties this year.
Summary
To those who have invested with us, I thank you for trusting us with your hard-earned capital. We will continue to work diligently to improve the value of our existing properties and provide you with more great investment opportunities this year.
To those who have not invested, I am excited at the opportunity to work with you on a project this year.
Sincerely,
Ryan Auger
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