Wednesday, February 3, 2021

Fernando’s Year-End Self-Storage Review & Predictions for 2021

Welcome to the final video of the year by the Storage Stud.

For Fernando, this is a very interesting year for self-storage space. He always knew that storage space is a recession resilient asset. When you look at the past recessions that we went through, the numbers are fantastic for self-storage.

In addition to self-storage for being one of the most recession resilient assets, it also produces some of the highest returns that we have seen for the last 30 to 40 years.

Also, one of the things that Fernando and his team noticed in their portfolio of properties that they owned is that the occupancy rates are going up during the recession. He thinks that one reason for this is people were either downsizing or moving back in with their support network, like family and friends, and then placing their possessions in storage.

They also notice an increase in sales of commercial clients. They got rid of their office space and other expenses for warehousing and placing them into self-storage.

While in predictions, for Fernando it looks like the lending business is looking to place loans in their asset class self-storage.

Fernando O. Angelucci is Founder and President of Titan Wealth Group. He also leads the firm’s finance and acquisitions departments. Fernando Angelucci and Steven Wear founded Titan Wealth Group in 2015, and under his leadership, the firm’s revenue has grown over 100% year over year. Today,

Find out more at
https://www.TheStorageStud.com
https://titanwealthgroup.com/​
Listen to our Podcast:
https://thestoragestud.podbean.com/

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Hello! Everyone. Welcome to the final video of the year. I wanted to do something a little special, kind of do a year-end review for 2020, and then some predictions for 2021. It's been a very interesting year in the self-storage space. I have to admit, you know, we always knew self-storage was a recession resilient asset. When you looked at the last three recessions that we've gone through, the numbers are fantastic. I mean, lowest default rates across all asset classes. And those were numbers that were reported directly from banks. You know, we had trapped data. We had, Wells Fargo data, CMBS loan data as well. One of the things that was very interesting to notice is although self-storage is one of the most recession, resilient assets as well. It also produces some of the highest returns that we've seen over those 30, 40 years as well. Well and above multifamily and single family.


One of the things that we noticed in our personal portfolio of the properties that we own, where that occupancy rates were actually going up, not going down during the recession. I think one of the reasons for that is that people were either downsizing or moving back in with, you know, their support network, be it parents or friends or children, and then taking their possessions and going and storing those things. We also noticed an uptick in commercial clients as well, getting rid of office space, getting rid of, you know, superfluous expenses for warehousing, and then shifting that over to a self-storage unit that they had a little bit more flexibility on. The second thing that we noticed is that our delinquency rates actually stayed level and in some areas actually dropped. And that one was a little bit harder to explain, but where I think it's coming from is the fact that, you know, when you have a $3,500 mortgage or a call it $2,000, monthly rent, it's a lot easier to pay your $85 a month storage unit costs than it is to pay that 2000 or $3,500 cost per month to, for housing.


So, I think it's just one of those things where people were kind of segregating costs and trying to figure out what they had available to them with, you know, storage. We were not subject to the same restrictions that a lot of these multifamily and single family owners were subject to, in most states and in most counties across the United States, the local municipalities put a ban on evictions or foreclosures. And that we didn't see that on our assets. So, you know, because self-storage is a non habitation investment or non habitation real estate. It's, there's not this negative stigma of, Oh, I'm putting someone out on the streets and they're going to be cold. You know, for us, it's, you know, storage is us, it's a superfluous expense. And if you really don't need it, you don't need it. And if you decide not to pay your storage bill, like, you know, there may be an auction that could happen.


We did not proceed with any auctions during this time just because we know people are struggling. But we did reach out to every one of our tenants to try to see what we can do to help them, see if there's a way that we can modify the rents, maybe take less payments today and then put them on the backend tomorrow. Or in some cases we even forgave rents, just to keep people in that had showed a good history of paying on time. And that we're going through a temporary situation. So, it's been very interesting on that front, how our delinquencies that stayed the same or actually dropped in some situations. And then, the last thing that was very interesting to us was demand for storage, went through the roof and with that, our street rates went up as well.


So, in many of our properties, especially in the Midwest and some in the called, Mid East and Southeast our street rates actually went up in some areas substantially. Anywhere between, you know, two to 5% and in some areas all the way up to 20%, just because we just, there's no storage available in those markets. It's get to the point where, you know, we're building additional buildings on some of our properties. And within one to two weeks of us getting certificate of occupancy on that building, that entire building is full. It's completely rented out. We're noticing this in our North Carolina property, where we just doubled the size of the facility and those units are renting out quickly. Now, we're thinking about tripling the size of the facility, adding another three or four buildings onto that same plot of land. And then now we're even looking for additional parcels of undeveloped land to continue to expand each of our facilities.


We have a facility down in Central Illinois where our closest competitor right down the street you can get to her facility with a golf cart, you know, in a couple of minutes she wanted to sell and she just wanted to be out. So, we were able to pick it up at a pretty decent price. I think it was very fair. We paid appraised value, which is no problem. The value to us was the fact that we're doubling the size of our holdings in that market and dominating the entire West side of that city. So, there's gonna be a lot of economies of scale there and planning on continuing to build up that portfolio. We're now looking at tearing down a few houses we have on some of that land that's been vacant. And just putting up additional storage units because these things are just renting out so quickly.


The very odd piece for me has been the responses from sellers. And I have to put them in kind of two buckets. The first bucket is the properties that were brought to market through professional means or through real estate brokers that are specialized in self-storage because self-storage is doing so well during the pandemic. And in historically in recessions, a lot of the big money, the REITs in the hedge funds, they have been driving prices through the roof. I'm getting listings on deals that I would normally pick up for anywhere between a seven to a 10% cap rate. They're coming to market at three and a half to 4% cap rate. I think that's just absolutely ridiculous, but there's people that have the money that are willing to pay those prices. So, more power to those brokers. There was a recent sale where Blackstone purchased simply self-storage or simply, I think it's simply safe for simply self-storage.


And they paid a 4% cap rate on the entire portfolio to the tune of like 1.3 or $1.6 billion. So, if Blackstone thinks it's a safe investment, that's a good sign for us. It's also a bad sign because now it means that the market's going to start getting more and more crowded, which is all right. It's a very fragmented market to begin with. On the flip side, though, we've noticed a lot of sellers that are not going through traditional or professional means let's call them, you know, these mom and pop owners, reaching out because they just want some cash. They don't know what's going to happen in the pandemic, and they want to sell an asset that maybe they've been running as a hobby. We've been picking up these deals for just fantastic prices. And it's just so counterintuitive to me because, you know, you have one of the best assets to hold during a pandemic during a recession, and you're trying to sell it for easy cash now.


I'm holding everything. Right? I'm trying to make sure that we're building up these cashflow machine. Adding, I think last year we added 10 or nine or 10 new facilities to our portfolio. As of today, December 30th, 2020, we have seven self-storage facilities under contract currently, with the goal to add about another 20 facilities next year. So- really starting to pick up a lot of steam on the self-storage front. The, it's just been fantastic. The other thing that was very interesting to me was the response from lenders. When most lenders were shutting their doors, not answering their phones, you know, dealing with the PPP loans and you know, dealing with hotel and retail loans going completely defunct, office space has been getting crushed recently. These banks are trying to flock now to assets that balance out their books assets that historically have the lowest default rate across most of the assets that they land on.


So, we're getting fantastic rates given to us. I mean, we're doing a ground up construction project of a class A facility, right? So, $13 million build, it's 140,000 square feet. We are going to market to get a loan, right when the PPP loans were issued. So, now all the banks are calling all their barrowers and saying, Hey, we don't have time to work on your real estate loans because we have to fulfill these PPP loans. But, for storage is the exact opposite. I got some of the best rates I've ever seen on ground up construction. Typically, as far as the risk continuum goes, you know, you have stabilized cash flowing assets on one side, that's the safest thing you can do when it comes to self-storage. And then on, the other side, the risk, your thing is to build giant ground up construction, brand new construction.


Usually the banks will see this as something that's a little bit more risky than giving a loan on a stabilized portfolio of self-storage facilities. But, on these ground up construction loans, we got a 4% rate interest only for three years. And then, it converted to a amortizing loan. We got another three years with a 25 year amortization, again at 4% which for a ground up construction loan is just fantastic during the PPP, during the pandemic, it was just insane. And then now, we're getting a bunch of historically heavy multifamily, heavy office lenders, heavy retail lenders reaching and finding us on YouTube, finding us on LinkedIn, bigger pockets on Facebook and reaching out saying, Hey, Fernando, you got any loans for me? We're looking for cashflow in self-storage. I had an individual from Morgan Stanley gave me a call offering me just amazing debt non-recourse debt, 10 year balloon, 25 to 30 year amortization option to go 10 years interest only if I wanted to with rates spanning from 3.3 to 3.7%.


And again, this is non-recourse. So, it seems that the lenders are really looking to place loans in our asset class, in self storage. So really excited about that and trying to lock up as much long-term debt as I can. Don't know how long this low interest rate environment is going to last. I think probably another two, three years, the way that we're seeing it right now. Any type of variable rate debt that I have, I'm looking at hedging. So, creating a hedging strategy that basically creates a fixed rate debt with me, by using the loan itself and then the hedging strategy as well. So, it's just been very interesting and I think it's exciting because it's going to be really good couple of years for self-storage here coming out. Same thing with on the buyer side, you know, our turnkey buyers, our REIT buyers or hedge fund buyers or private equity fund buyers.


They are offering prices. I have never seen before. You know we had a deal that we decided, or I guess we underwrote with an exit at 17.6 million. The appraisal came back at 19.4 million. So, just crazy difference there. And I think that's just because of the recent sales that have been happening, have been driving the cap rates down the market caps on these regrade assets, these larger facilities, you know, 80 to 150,000 square foot facilities is REITs are really just trying to place their capital somewhere. So, it's not burning a hole in their pocket and, you know, losing value to inflation. And what have you. So, it's been really exciting last couple of years in the self-storage space. And now everybody that, you know, told me I was crazy, or, you know, for selling all my multifamily, selling all my single family.


Now they're calling me back asking how they get involved in self-storage. So, it's been an interesting change of events. As far as the future goes specifically 2021, we're going to try to add another 20 assets to our books. We've started focusing on ground up development projects, as well as conversion and adaptive reuse projects. I think there's a huge opportunity here for self-storage developers. You have all these big box stores, they have all these retail stores that are defaulting on a mortgage that is trying to get out from underneath their mortgage. A lot of malls, Kmarts, circuit cities, best buys these type of area. These types of retail and big box stores are having a tough time and we're coming in and we're scooping up the shells. These buildings, the envelope for, you know, anywhere between seven to 12 bucks, a square foot putting in another 35 to $50, a square foot in adaptive reuse, conversion, or renovation.


And now we have a self-storage facility that I put up for 60 to 65 bucks a foot, when to build one new it would cost me $90 a foot to do. So, it's been very interesting. We really liked this strategy going forward, and we're purposely trying to find those deals very aggressively. Another thing that we have in store for 2021 is taking advantage of incentive programs. So, commercial pace has been a big one that we've been looking at historical tax credits, solar credits. We have a couple of big deals that we're looking at offsetting the utility to expenses by putting a solar array on the roof. And then doing a lot more syndications. It seems like we have a lot of equity investors that before were comfortable being in the stock market, the bond market. Now, you know, fleeing from those areas because of the volatility and wanting to put their money into something that's a little bit more stable you know, a physical asset that they can go and touch, something that hedges against inflation.


You know, one of the biggest issues that we're facing right now from the monetary and fiscal side is we're pumping buckets and buckets of buckets of funny money into this economy. It's monopoly money, right? It's Fiat currency. So, what happens then is that heavily devalues the purchase power of the dollar. And because of that, if you're in cash, if you're a saver, you're going to get hit pretty bad, but if you're in real estate or self-storage, specifically, that's a hedge against that inflationary pressure, because as the dollar drops and you need more dollars to buy the same assets, if you own those assets, that means you have something that will travel with inflation, the price will travel with inflation. And then, in addition to all the other types of appreciation that we're getting, you know, forced appreciation, the cap rate compression in the market, low debt, super low interest rate debt, we're trying to lock up long-term. Specifically types of debt that will be assumable. I think that's going to be a huge market in the next five to 10 years. Once inflation starts going up and interest rates are going up again, you know, those holding these 3% and 4% debt that's assumable, all of a sudden their property is now worth 10, 20, 30% more than their competitors property that does not have assumable debt. Where the investor is going to have to go take, you know, a six or 7% loan. So, that's kind of what we're looking forward to in 2021,


Really excited. We're really excited about all the partnerships we're doing. Then, just fantastic with you know, with the social media stuff that we're doing and the videos I have to thank my good friend, Scott Paton. He's been the one that's been kind of on my tail to put content out there to tell people what we're doing. And because of that, we've had equity investors find us and invest in our deals. We've had a multifamily and single family guys. I want to learn self-storage space and partner with us. We've had wholesalers bringing us deals. We've had brokers finding pocket listings and sending us those deals. It's just been a fantastic 2020 for our storage company or self-storage companies. So, I'm hoping you guys all have a happy new year and looking forward to seeing you in 2021, make sure to like, and subscribe and click the little bell for notifications.


Feel free to drop some comments below. Any questions or any topics you'd like to cover. And then, if you'd like to reach out to me personally, feel free to hit me up on any social media channels. It's at The Storage Stud you can go to our website, www.TheStorageStud.com And if you're looking for investment opportunities, or if you're looking for wholesale deals, we also wholesale self-storage facilities that are a little bit too smaller, too small for us, you know, kind of starter facilities. We wholesale those to other investors that are looking to get started, but without too much risk you know, feel free to reach out. So here's to wrap it up 2020 and Seeing you in 2021. Thanks guys!

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