As the self storage industry experiences a record number of new project deliveries across the country, certificate of occupancy (C of O) transactions have become increasingly popular and are likely to accelerate heading into 2018. Over the last several years, developers have been selling brand new projects completely vacant at handsome profits for well-constructed properties in ideal locations. In 2015 and into 2016, the vast majority of C of O trades were reserved for the top 30 MSAs in infill areas with higher barriers to entry. As developers looked further outside the traditional urban cores’ first and second ring population centers, more speculative building began occurring in outer lying markets. New opportunities to buy C of O properties emerged as more investors were willing to pay a premium for freshly minted square footage they could begin renting immediately to forgo a time-consuming development process.
When prospective purchasers evaluate a C of O project for acquisition today, purchase price usually comes down to the one major item that is commonly the most difficult to project – market rents. Missing rates by as little as five percent can throw an evaluation off by hundreds of thousands, if not millions of dollars. If a clear path to stabilization at achievable rents is presented, the odds of closing the transaction increase exponentially. Missteps often occur on old rental data gathered when the project was in the early stages of planning. Neglecting to track the market rates during the planning and construction phases can prove costly. Revenue management algorithms can change rates daily and new competition may be impacting the trade area, so you can bet rates have changed for better (or worse) in most markets. In addition, it is important to remember that the newest facility on the street does not necessarily always translate into higher premiums over existing like kind competitors. Understanding the property’s unique competitive advantage and the amenities tenants’ value goes a long way in projecting accurate asking rates. Make it easy for the buyer to check the boxes - achievable rates, strong location and quality construction - and there is a great chance you will get to the closing table on time and at a favorable price.
About the Author
Adam Schlosser is a partner in the Denver-based LeClaire Group and Senior Director of the National Self-Storage Group within Marcus & Millichap. He also heads up the LeClaire Group’s CofO Evaluation and Disposition division that specializes in advising developers/owners through the sale of facilities in various stages of development and/or lease up. Contact Adam at Adam.Schlosser@MarcusMillichap.com