For the last several years you've heard many operator/investors, including myself, bemoan the very competitive seller's market we were living in (across asset classes). Finding deals with asymmetric upside was very difficult and required either getting lucky or having a truly differentiated acquisition strategy.
The stock market was roaring. The real estate market was up and to the right. Money was free. Well, you may have heard that things are changing...
The current market
While I can't yet say we're operating in a target rich environment, it's clear the commercial market has begun a shift that will eventually favor buyers. Buyers that have access to capital, that have operational experience, and that have the flexibility to creatively structure deals, will be able to acquire deals that were far out of reach even just one year ago.
I am skeptical we will enter a truly distressed state in the commercial markets, but there are bound to be more opportunities in the coming year than the previous. How should we, collectively, position ourselves? Our approach is the following:
- Stay active: We are continuing to reach out directly to existing owners in our target markets in NC/SC as well as brokers. We want to be top of mind when sellers have to sell.
- Ready capital: Now, when there is fear in the market, is the time to ready capital for deployment. We are accumulating capital and exploring various forms of capital extraction from existing projects so that we can act quickly for new acquisitions, even in the face of more conservative lending standards.
- Solidify existing properties: All our existing properties have debt with 3+ years remaining on their term, meaning we have the benefit of time to let the market settle before making any disposition decisions. Additionally, they are all operating with significant margins above existing debt service requirements.
- Patience: In any market there is the overwhelming motivation to chase deals. We will never be a volume-based real estate acquisition company, so even in an active market we must remain patient and only pursue the deals that align with our investment thesis and operational abilities.
Investing is a uniquely personal experience dependent on many factors. However, as somebody whose investment decisions must be made outside a purely personal context, here is what I believe to be true:
Now is the time to step outside the fear of the moment and be excited about the long term investment potential of commercial real estate.
We are working hard to bring you our next investment offering and hope you will be excited for the opportunity this market presents.
One level deeper
What does it mean to stay active even as the macro-economic environment changes? Surely it doesn't mean keep doing the same thing with the same criteria as at the height of a bull market?
Well, actually...
Because our underwriting approach is never focused on exit scenarios or final returns (we have always focused on the cashflow and viability of the business on an ongoing basis), very little has changed with how we evaluate opportunities. Yes, we are looking for a greater margin of safety than before, but the process itself has not changed.
When your evaluation focuses on fundamentals and not side-effects, you are able to operate with clarity in any environment.
(For an even deeper dive into the technical details, see my previous article on the return on cost here and why IRR is not your friend here).
Portfolio updates
As we have gained more experience with the management of our storage properties we have become more familiar with the seasonality of the asset class and the nuance of each of our individual markets.
Despite fall time traditionally being a slow storage leasing season, we have been able to have our strongest leasing month to date at both facilities.
We are utilizing a variety of move-in specials and a strong referral network to increase our occupancies, even during the slow season. We intend to be in a very strong position come the Spring leasing season and expect to see revenue continue to grow throughout 2023.
On the STR front, the cabins continue to lease well even though there are superficial signs of weakness (more reservations come at the last minute, slight dip in occupancy, etc...). Still, we remain at 85%+ occupancy across all cabins which is 20%+ higher than the market average. The cabins continue to be steady and strong performers within the portfolio.