JACOB VANDERSLICE 0:00
That new capital and that that large amount of capital that wants to be in this space is still there. And that capital is still buying assets so that demand from investors is still keeping values up and cap rates compressed. I think that’s again, just a function of the demand that’s out there. Eventually, though, in a rising rate environment, you cannot continue to sustain compress cap rates, right, if your cost of capital on the debt side is going up, you can’t finance at a 6% rate and buy a deal at a four cap, right? Doesn’t work. So eventually cap rates are gonna have to go up and values will have to go down and kind of moderate. We’re seeing some anecdotal evidence that cap rates are increasing a little bit but it’s so variable from market to market and deal to deal you might say cap rates have gone up 25 basis points in general, something like that. So if a stabilized deal was trading in a four cap a year ago, it’s probably trading at a 425 today,
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J Darrin Gross 1:19
Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.
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Today, my guest is Jacob Vanderslice. Jacob is a principal at Van West Partners, a Denver based real estate investment firm, focusing on acquisition and management of self storage centers and other opportunistic real estate. Throughout the United States, Van West has established a track track record with over 195 million in real estate assets.
And in just a minute, we’re gonna speak with Jacob, about self storage, investing in self storage during an economy of change. But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple of things you can do to help us out. You can like, share, and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, and please subscribe. With that. I want to welcome my guest, Jacob Vanderslice, welcome to CRE PN Radio.
JACOB VANDERSLICE 3:11
Good morning, Darrin, thanks for having us on.
J Darrin Gross 3:14
Well, I’m excited to speak with you today. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.
JACOB VANDERSLICE 3:23
Yeah, we’re, I’m a principal at Van West Partners. We’re a private equity shop based out of Denver. I’ve been investing in real estate full time since about 2006. We started off in the residential space, we did a lot of single family residential buy, fix and sell deals over the years. Well over 1000. We got into commercial real estate space and 13 and 14, doing adaptive reuse retail projects around Denver. And then we got to self storage in 2015. And we started off with a few ground up development projects locally and then kind of kept going. So we got to the asset class because we liked its historic downside protection, scalable, durable, repeatable income streams. And we didn’t really get into storage thinking we were going to become a primary Self Storage operator as a primary line of business. We just kind of did a deal or two and kept going. And that’s evolved into being our main line of business. We still own and operate some of our retail projects around town and a bunch of single family rentals. But I’d say 95% of our bandwidth is self storage.
J Darrin Gross 4:28
Got it? You mentioned partners, how many partners do you have at Van West?
JACOB VANDERSLICE 4:34
So I’ve got three partners. One of them is Aaron Westfall. We go back to junior high together, we’ve been partners and really everything we’ve done since 2009. Wade Buxton. He joined us as a partner in 2014. And our most recent partners, John Sutter, who joined us as a partner in October of last year and he came from another self storage investment company, and he’s an expert in ground up development. So John is leading our development initiative.
J Darrin Gross 5:01
Got it, so everybody has kind of an area of expertise then.
JACOB VANDERSLICE 5:04
Yeah, we’re a relatively small shop, we kind of wear a certain hats, but there’s of course, a lot of overlap too.
J Darrin Gross 5:10
Got it. So you mentioned your your kind of evolution. Starting with the single family, it sounds like you guys are pretty involved in the flips, 1000 flips, that’s not a, you tried and it didn’t work was that more a matter of just the the timing was that, it sounded like you started kind of post crash. If I got my my notes right.
JACOB VANDERSLICE 5:36
It worked for it worked for a long time. And we kept the business going with our other lines of business really until about probably two years ago. And the reason we partner say we shut it down, I say we paused it indefinitely, because I sure enjoy the single family business. But the reason we shut it down was a couple couple issues one deal flow was challenging. If you’re if you’re sourcing deals today in the single family space in a lot of spaces, you’re probably doing a lot of marketing, direct to seller marketing. And those fixed costs can become pretty high when you’re not doing a lot of volume in a really tight market. To the reason we pivoted is mainly we kind of looked ourselves in the mirror and decided that we want to get away from transactional income streams, we want to get away from buying making better and selling over and over again, and start buying making better and building an asset base with recurring revenue streams and recurring cashflow. We thought storage was a great vehicle for that. And a lot of guys have done that single family residential, we did that to a small degree with our rental portfolio. But we just wanted to get away from being traders to building a larger asset base for the long haul. And we thought storage was a good vehicle for that. So that’s some of the reasons for the pivot.
J Darrin Gross 6:56
I love it the kind of get rich, slow kind of a thing is the you know, acquire it and and let the rents grow up and the tenants pay down the mortgage. And and I mean, I love the the cash flow real estate and and how it keeps growing with you know, inflation and that that’s that’s awesome.
JACOB VANDERSLICE 7:18
Yeah, I think the definition of wealth is it’s not net worth. I think it’s passive recurring revenue streams.
J Darrin Gross 7:26
Yeah, no, I vacillate, because sometimes I get caught up in the net worth side of the equation. And then you have something like what’s going on right now where everything may be revalued? And that may not be what you thought it was?
JACOB VANDERSLICE 7:39
Yeah, if your if your net worth is not paying you on a monthly or quarterly basis, maybe you got to reevaluate that. I mean, let’s say let’s say I did you a $10 million mansion free and clear, right? Well, you got to pay the property taxes, you got to pay the landscaping and all the utility bills. And the only way for you to monetize that $10 million asset is to either put debt on it and have a mortgage payment or sell it. It doesn’t produce any income. So we we like assets that produce income.
J Darrin Gross 8:08
Amen to that. So you mentioned your strategy. Sounds like you started off doing some ground up. Is that your current strategy? Are you guys also acquiring existing facilities?
JACOB VANDERSLICE 8:23
Yes, we do both. We recently launched our third Self Storage fund, and fund three is focusing on buying under Managed existing facilities, and adding value with occupancy and revenue growth and capital improvements on the front end, or development line of business. For right now we’re doing our development deals in single asset syndications. And briefly, for those of us listening who may not be clear on the difference, a fund is typically a collection of assets that you invest in, and you’re participating in the economics of the entire funds asset base. So if the fund has a deal that’s underperforming for whatever reason, that deals hopefully balanced out by the other 10 deals that are on forecasts are ahead of forecast. And syndication is typically just a single asset. So you form an LLC, you buy a deal, you go out and execute. Well, that deal doesn’t go well. There’s no other sources of revenue to kind of shore up the deals income statement. So the reason we’re doing our development projects and single asset syndications is really primarily because ground up development is too different. Have a risk profiling and we’ll touch on risk later. But it’s two different risk profiles and buying existing facilities. You’re taking entitlement risk, you know, hard cost risks. Even if you buy a facility that’s empty, you’re you built, you’re limiting the construction risk because you have a building on the site, you still have lease up risk and you know, revenue forecasting risk, but the profile is different on a development project and that’s why we’re doing them outside of fun three for now.
J Darrin Gross 9:55
And I love the explanation. Pretty clear as to you know the why Is there that’s great is far as your your portfolio right now. Before we started recording you mentioned you guys are Denver based or your or your property is primarily in the Denver area or where whereabouts are you guys located?
JACOB VANDERSLICE 10:16
They’re actually not. Unfortunately we love our backyard, a Colorado native, but finding arbitrage here is difficult, just given how inflated the environments become. We have not done much in Denver with the exception of we bought a value at acquisition on December 31, in a town called Loveland, kind of between Denver and Fort Collins. And then we bought a development acquisition in Longmont, which is south of Loveland, kind of between Denver and Loveland. But that about two weeks ago, so until recently, we haven’t really done much in Denver, other than a few deals here and there for some number of years. So most of our portfolio is concentrated in the Midwest and southeast and southwest. So we have deals in Wisconsin, Illinois, Michigan, Ohio, North Carolina, Tennessee, Georgia, Florida, Arizona, so good to be Oklahoma. So those are some of the states we cover.
J Darrin Gross 11:18
And these are all self storage?
JACOB VANDERSLICE 11:20
All self storage. Yeah. And these, these kind of secondary and tertiary markets have been attractive, especially lately, because we found they have a good blend of current yield with capital appreciation. If you’re buying storage deals in primary markets, like like Seattle, or LA, for example, cap rates are excessively compressed and values are very high. So your your yields from a current cash flow perspective are pretty light, the total returns the deal might still be fairly attractive, but that dividend yield along the way is much lower than it would be, say in Pensacola, Florida,
J Darrin Gross 11:56
or Charlotte. Yeah, no, that’s kind of more of a transactional kind of a approach, I think, at least unless you’re coming on with cash, like some, you know, some big readers on like that, or at least that’s kind of what I have come to understand about that. So in these secondary and tertiary markets that your internet second, yeah, yeah, secondary and tertiary markets that you’re investing in? What are the what are the what’s the criteria that you look for in a market?
JACOB VANDERSLICE 12:30
Well, I guess we’ll start specifically with self storage. So the first thing we look at our supply ratios. So how much supplies in the sub market self storage is very sensitive to supply, and it kind of depends on the market. So So markets can have fairly high amounts of supply. But the facilities are flooded or full, because the rates are fairly low. And the reason therefore, is because more consumers can afford to store at 90 cent rates than they can at $2.50 cent rates, right. So we look at supply ratios first. And then we also we also analyze objectively and subjectively, to a degree, the risk of the introduction of a new supply in the foreseeable future. So are there building permits being pulled nearby as someone gone into a pre flight concept review with the city to see if they can build storage. That’s one of the bigger risks in our industry, again, is the on forecasted introduction of new supply. So those are really some some self storage specific things we look at. And beyond that, we’re looking for deals that are well located in markets with a story for population growth, good demographics, we look for housing density, we stay away from deals and in overly rural locations, just because there’s not the consumer base out there to store then there might be in a more dense location. So to a degree, I’d say we’re fairly geographically agnostic. There’s a deal on a new market. That makes sense, we’ll probably go there. As long as we believe we can get scale in that market. There aren’t really markets that we’re we’re saying no to, but there are certainly markets, we’re not targeting like the northeast, for example. We’re not looking too carefully up there for a number of reasons. California, it’s tough to get stuff done. So we generally like, you know, the, the higher growth opportunity markets where we can buy at a discount, but still get a good return on a current basis. And good, story for appreciation too.
J Darrin Gross 14:31
You mentioned tough to get it done. kind of curious self storage by itself, as opposed to like a multifamily, something more housing related. Is there a lot of resistance or is it more of just the each jurisdiction has their own little persnickety way of doing things or?
JACOB VANDERSLICE 14:49
Yeah, I mean, it certainly varies from city to city, but generally there’s a lot more resistance from a zoning code and entitlement perspective to self storage and there used to B, cities don’t love it for whatever reason, it’s got lower sales tax revenue, it’s not a use, they generally want to see, they want to see a grocer come in, or they want to see big box retail come in with high sales tax revenues. So one of the reasons we’re developing now is we’ve never seen the barriers to entry for development higher than they are now. And there’s really two two reasons for that. One is what I just mentioned, it’s really tough to get projects entitled takes sometimes a year, to get your building permit, depending on the market you’re building in. And secondly, which is kind of obvious, given the environment that we’re in hard costs have gone up substantially, of course, compared to where they were a couple of years ago. So rents thankfully have gone up incrementally more than hard costs have. So it makes sense to take a higher cost basis, because rents are up and are probably gonna be up for a while. So that’s one of the reasons or two of the reasons I should say we’d like developing right now, generally, just because once that project is completed, it’s going to be really tough for a competitor to replicate it anytime in the foreseeable future.
J Darrin Gross 16:07
Yeah, that makes complete sense. If you have a lock on keeping the competition out. You mentioned kind of the the rates kind of thing. You said some around 90 cents versus like 250. Is there a is that rate, is it fairly steady across the territories you’re in? Or does it vary dramatically? Based on? You know, the the particular MSA or area that you’re investing in?
JACOB VANDERSLICE 16:37
Yeah, it certainly varies dramatically from from MSA, to MSA. But with within that sub market, there are certainly variances I wouldn’t call them dramatic though. For example, if you have a new building that’s climate controlled, a 10 by 10 is gonna get a higher rate than a 30 year old building that single storey drive up non climate control down the street. So there’s some variances on the on the revenues, as it relates to the location and the building quality and whether it’s climate controlled or not. But they’re not they’re not massive, but they move the needle a lot. If you’re modeling out, storage acquisition, plus or minus 10 cents per square foot per month amortized across hundreds of units can really move the needle from a return perspective both up and down.
J Darrin Gross 17:26
Yeah, no I can I can imagine. With the different projects that you’re doing or assume anything new you’re doing more of a climate control is typically the case or
JACOB VANDERSLICE 17:40
Yeah, or value add acquisitions we’re doing are a mix of climate control and non climate control. Some are multistory some are single story. But our development projects are by and large, multi story climate control. With the exception of one deal we’ve got that we closed on about two weeks ago in Longmont. That deal is going to be single storey climate controlled units and non climate controlled units kind of a mix. And we can figure the buildings based on the sub market demand. Some sub markets that are a little more suburban, they don’t want to ride elevators up to store their stuff, because they have plenty of options to not do that. Think about if you’re storing, do you want to show up to your unit and your truck right there and open the door and unloaded unload? Or do you wanna put your stuff on a cart, push it through a doorway, wait for an elevator, ride the elevator, push it down a hallway and kind of rinse and repeat. So we’re only doing the multi story locations in in some markets that, that support that building type. Yeah.
J Darrin Gross 18:42
And in as far as the, the, or I guess you’ve kind of alluded to and suggest that most of what you’re doing now is is new development as opposed to align existing or
JACOB VANDERSLICE 18:57
pull fund three is buying existing. So we bought, we bought about we bought two deals so far this year, totaling about 23 million in total cost. It’s been a slow start to acquisitions, given the environment. We’ve got quite a few deals that are in the pipeline. We’re excited about. We have four properties in Oklahoma. We’ve got another deal in Michigan and we’ve got some stuff in Florida that’s pending South Carolina. So yeah, fun. Three is only buying existing facilities, but our single assets indications are doing raw land ground up development. So we’re
J Darrin Gross 19:28
gonna get to That’s right. You mentioned that. So with the the acquisition of the existing Are you finding that? Are they kind of just an older owner that’s kind of tired or is is like another investment firm that’s looking to get out or what’s
JACOB VANDERSLICE 19:46
it varies? I would say the bigger owners that we buy from are kind of smaller regional operators who might have constructed a portfolio over many years and they’re finally monetizing it. Other owners are just kind of folks that fell Under the business, they’ve owned it for 20 years. And the reason we can find arbitrage, on deals like that that might be 95% occupied, is because their rates are too low. And they lack the capital to do the necessary repairs to kind of upgrade the building, sometimes they don’t have very sophisticated revenue management in place. Self Storage revenue streams are very dynamic, they vary by the by the season by the unit type. And in some cases, they don’t have a website, which is, you know, which is amazing. But a lot of these operators don’t have websites, just a bit of a landline, you call them up, you lease your unit. And obviously, customers don’t like that these days. So we upgraded facilities, we add value with rebranding improvements, and mainly from from our operational platform, to
J Darrin Gross 20:51
Hana. And as far as the the territory that you guys are invested in, how do you go about managing? Do you have employees? Or do you sub that out? Or what’s the man Yeah, we
JACOB VANDERSLICE 21:00
used to outsource our property management to the national REITs when we first got in the business, and we were initially dazzled by their revenue management algorithms or branding their marketing platform. And after the honeymoon was over, we realized that they just don’t care about your deal as much as you do. They’re a third party, there’s a lot of revenue streams, ancillary revenue streams in the business that they would keep and not share with the ownership group. So we formed our own management platform about four and a half years ago, years ago called Clear home self storage. And we started taking our deals back from the REITs. And everything we bought, since we self manage property management is painful. It’s not very profitable. But you know, growing revenue, and growing noi are the keys to delivering value to your investors and to the asset base. So that’s why we self manage. As far as our staffing goes, we’ve got about 75 employees, 15 of those are here in our Denver office and the balance are scattered around the country, onsite managers, regional managers in our in our various self storage facilities.
J Darrin Gross 22:14
Got it? I think, you know, I always find interesting is how a lot of times people think of investing is like just putting money in and get money out, as opposed to actually the human capital, of managing, you know, an asset, especially when you’re not using a third party manager, kind of thing. It’s I mean, it’s an actual, the business as opposed to just a, you know, an investment, where you replace capital and you get returned kind of thing. Any challenges that you’ve you’ve, you recognize that you run into with more of the human capital management?
JACOB VANDERSLICE 22:52
Oh, absolutely. Staffing is a major challenge. And it varies from market to market. One specific market for whatever reason, we have a really tough time finding and retaining talent is Columbus, Ohio. I don’t know what it is with that that area. But we’ve just we’ve gone through a number of employees and one of our sites out there versus the Florida Panhandle. We’ve got amazing employees there who’ve stayed with us for a long time. But staffing is generally a big challenge. We’ve had people you know, had a great, great interview, they’re scheduled to start Monday, they don’t even show up, they never call us back again. That’s happened numerous times. But we’re also you know, we’re talking about employees that are making, you know, high teens $20 An hour hourly wages. So they tend to be a little bit more transitory sometimes, but when we find someone good, we treat them right, we do everything we can to retain them.
J Darrin Gross 23:46
Ya know, I’ll bet because I just know that the turnover thing is just like it’s complete. Just like, you know, a buzzkill. From the standpoint of like, everything’s up and running. Now you gotta teach somebody new or find somebody new. So yeah. Again, and again,
JACOB VANDERSLICE 24:00
thankfully, self storage. It’s a very, it’s a very operationally intensive business. Believe it or not, it’s not people think, Oh, no tenants, no toilets, no problems that could not be further from the truth. And we have we have problems every day. We have people sleeping in units, we have theft issues, when we have 1000s of units around the country. Given that scale, you know, bad stuffs gonna happen every day. But thankfully, overall, the industry is not as reliant on a person being there all the time, as big as other industries might be because our customers can lease units online, get their gate code online. If they if they choose to. They don’t have to talk to a person throughout their entire leasing experience with us. So the people components very important, but it doesn’t put our lights out if we have a staffing issue on a given deal.
J Darrin Gross 24:51
Yeah, that is key. I love that fact that you you’ve got it all online where somebody can do it and more and more. I think people are just there. they get frustrated if it’s not an option.
JACOB VANDERSLICE 25:05
But myself included I mean, every every morning on the way to the office I do with Starbucks mobile or the baristas are great people, and they’re nice to talk to. But if I can just blast in there and pick up my coffee off the counter and leave. That’s, that’s what I prefer. Yeah, people are the same way.
J Darrin Gross 25:20
And I think there’s there’s certain applications where it makes complete sense to have little or no contact, where there’s other things where there’s like, there’s an expertise that’s required. That’s not clear on the website that caused me some frustration. But yep, yep. Is there a minimum number of units you guys look for when you’re, when you’re buying a new, it’s
JACOB VANDERSLICE 25:43
not, it’s not so much a unit count. It’s more, it’s really two things. Its net rentable square footage, and total dollars. You’ll probably agree with this. But it takes about as much time if not more, to do a small deal as it does a big deal. So we’re not going to go I mean, we’ll look at stuff as small as maybe 25 or 30,000 square feet. But if it’s a new deal and a new market, we’re probably not going to do that just because it’s relatively small. But if it’s a it’s a deal and existing sub market are already in, we might look at that a little more carefully. Because we can we can buy that deal and have our fixed costs as far as staffing amortized across a larger number of units in the market versus just one deal. So generally, it’s 25 to 30,000 square feet minimum, if it’s a new market a new deal, it’s got to be at least 50. And we really don’t like to do anything under, gosh, three to $4 million. That’s probably even on the lower end. One of the smaller deals we bought in the last couple years was about 5 million. And those are big numbers to you. And I have courses individuals, but for for a sizable Self Storage fund. It’s just not a very efficient use of time and resources.
J Darrin Gross 27:00
I get it. I mean, you’re right. I mean, if you’re putting in the effort, and you’re running the deal, it’s a whole lot more rewarding if you’re able to get a larger deal. And and yeah,
JACOB VANDERSLICE 27:14
million dollar deal is still the same third party reports. Phase one, phase two, serve a property condition report. It’s still loan docs with a banker, it’s still tax returns, it’s still K ones. So yeah, we like to deploy larger amounts of capital, just given the fact that there’s fixed time and fixed costs and every deal.
J Darrin Gross 27:34
Remember, somebody said one time, less widgets, more digits. That was?
JACOB VANDERSLICE 27:38
That’s right. That’s right. Yep.
J Darrin Gross 27:41
Hey, let’s talk a little bit about self storage in the changing economy. Before we started recording, and anybody that’s listening, knows that the Fed is kind of got their pedal to the metal trying to break inflation and increase interest rates and do anything they anything possible to slow it down. Which, you know, obviously, it’s gonna reset, you know, values and just the way people respond kind of thing. And given that I’m just kind of curious, what are you seen? Do you have any kind of, you know, highlight list of things that you’re seeing in just the change from, you know, a year ago to now?
JACOB VANDERSLICE 28:27
Yeah, certainly. I mean, it’s, it’s very dynamic, right, it’s kind of changing by the, by the month, if not the week, there has been so much new capital that wants to be in self storage the last couple years, that new capital, and that that large amount of capital that wants to be in this space is still there. And that capital is still buying assets, so that demand from investors is still keeping values up and cap rates compressed. I think that’s again, just a function of the demand that’s out there. Eventually, though, in a rising rate environment, you cannot continue to sustain compressed cap rates, right, if your cost of capital on the debt side is going up, you can’t finance at a 6% rate and buy a deal at a four cap, right? Doesn’t work. So eventually cap rates are going to have to go up and values will have to go down and kind of moderate. We’re seeing some anecdotal evidence that cap rates are increasing a little bit but it’s so variable from market to market and deal to deal you might say cap rates have gone up 25 basis points in general, something like that. So if a stabilized deal was trading in a four cap a year ago, it’s probably trading in a 425. Today, competitive bidding situations, which there are still many of in fact most deals to hit the market have a lot of offers. We’re generally seeing seller expectations for the most part still being met but fewer buyers getting to that price. this point. And you know, I’ll talk about both sides of my mouth at the same time, we’re seeing some retreats here and there. So guys are going under contract on deals with a longer contract, maybe four months. And they get to the third month and their DD and their underwritten interest rate was four, and now it’s five and a half or six. So they’re going to sell or saying, dude, my numbers don’t work anymore, you know, I need x off the property, I’m gonna have to walk. And some sellers are agreeing to those price reductions and others are not. But the bid ask is certainly widening. But by and large, most sellers are hitting their numbers, but we’re seeing that shift, especially the last couple of months. As far as how we’re positioning ourselves in an uncertain economic environment, and likely either in a recession or entering one. We’re not departing from our discipline, underwriting standards, we’re being conservative, we’re setting assumptions in our models that we believe are very reasonable and achievable. We’re not going out and saying if everything goes perfectly, we’re gonna get a 16% IRR, right. But if it doesn’t, you know, we’re gonna we’re gonna get four, we’re gonna lose money. Because of that deal. Flow is challenging. We offer on a lot of deals every week, and we get a small percentage of those and most of our deal flow has been off market, either either completely off market direct to seller or with a broker relationship or inefficiently marketed. Maybe someone has a cousin at REMAX and they put their storage facility on the MLS. Nobody sees it who’s supposed to. But yeah, we’re we’re, we’re definitely watching, watching things change very carefully, I would say the biggest change on the debt side from this time a year ago, is not, not including interest rates, obviously, they’re up. But really two things. term on the debt has changed. So we were getting 10 year fixed financing left and right last year. This this time this year, last couple of months, where we’re doing some floating rate product. And we’re also seeing on our term debt we’re getting either five or seven years we’re not getting we’re not getting 10. We’re also seeing proceeds go down a little bit. Go with if we had go to lenders that were at 65, or 70% of cost last year, and now they’re at 60, or 65.
We’re also Historically, it’s been a lot easier on the debt side to do a massive deal than a relatively small deal. And right now, that’s shifted kind of for the first time, we’ve we’ve we’re leveraging our more regional lenders and our relationship lenders more so than we were, for example, our national massive lenders like last year, those guys are still down the land. And some of the bigger folks are really pulling back or they’re even paused until this whole thing kind of shakes out, we have a little more clarity. So the debt markets have definitely changed. But you know, whether we’re building a facility or we’re buying an existing one, our target is always cash flow. Cash flow is what lets us survive in a downturn. Notwithstanding a debt maturity coming up pretty soon, even if your values go down. If you have good cash flow, and good debt service coverage, you can survive. And and we’re not trying to just survive, we’re trying to thrive, of course, but that that recurring revenue and cash flow is what lets you get to the to the next cycle. So we’re very focused on that.
J Darrin Gross 33:39
And I think that that makes a lot of sense. You mentioned, you know, kind of the the financing terrain and how it’s changed. And you mentioned, there’s lots of capital looking to invest. Are you having any? Or has your experience changed with raising capital? Are you are the conversations different today with potential investors than they were a year ago?
JACOB VANDERSLICE 34:06
They absolutely are. Yeah, our capital raising has still been fairly robust. People are definitely pulling back. You know, we’re getting the equity, we need to fund our deals. But I’m not sure. I mean, there’s a couple reasons that might be behind that. One is we launched a new fund, we’re early on in fund three. fund two was closing late last year, and we had so much equity coming in, we had to turn guys away because we didn’t have the capacity for it. So when you’re launching a new fun, there’s not really a sense of urgency to a degree to get in. Now a lot of guys say, give me give me a quarter to keep sending me your updates. Let’s see how things go, then we’ll put some money in. But on the other side of it, too, I think the drop in public equities has not helped and the lacking confidence that’s increasing by the week is obviously not helping either. But we we really believe that self storage is a defensible place to be there. During times of uncertainty, which is why we’re all in on the strategy, it’s performed historically, well, during downturns, it performed really well during the pandemic. So we think it’s a good spot to be there’s of course risk in every investment, every real estate investments, but now is not the time to being to go to go out and stretch on a class A office development, right? Or how to buy tired storage facilities, with very granular month to month leases that you can respond to real time based on supply and demand, and kind of circle the wagons. So that’s why we like storage.
J Darrin Gross 35:42
And as far as the your your customers, the the renters that the tenants that that rent lease from you guys. Do you expect in a market as interest rates change and kind of the uncertainty? Is there the room for rent growth? Or is that kind of a your use your forecast, or your pro forma kind of look to kind of hold more, as opposed to maybe a more aggressive rent growth strategy?
JACOB VANDERSLICE 36:13
Yeah, we, both our portfolio and the portfolio of many other operators have seen just record revenue growth and noi growth, both from increase consumer demand and inflation in the last year. Our forecast, which is always wrong, of course, we think that customers are getting to kind of a breaking point on how high you can push rents. So we see a small reduction, and asking rates, maybe starting in q4, and going into 2023, because we just think customers are just hitting that kind of ceiling on what they can pay. They’re seeing their gas prices go up, their rents going up, you know, everything in their life is increasing, including their storage rent, and you can only do so much. So rate increases I think are going to moderate. It as far as kind of our strategy on rental growth and rate increases, it really varies from deal to deal, we’ll analyze the duration, a tendency of our customer base. You know, if someone’s been there for two years on a deal recently bought, they’ve never seen a rate increase, that guy is probably going to get a rate increase pretty soon. And we also analyze our rate increases not only from a percentage perspective, but from a gross dollar increase perspective. So if someone’s paying 30 bucks a month, you could probably increase their rate, you know, well over 10%, and it’s not going to move the needle for them much, they’re probably not going to move out. But if a guy paying 300 bucks a month, you increase his rate by 10%. But $30 might be enough for him to get a buddy in a moving truck and output his stuff back in his house. So we can have balances rate increases against against the gross dollar increase, and also the percentage.
J Darrin Gross 38:04
And we haven’t talked about vacancies. Yet. What is the typical vacancy rate you guys experience?
JACOB VANDERSLICE 38:14
It depends on the deal we buy, we buy some deals that are completely empty. And some deals that are 95%, we consider a stabilized property to be high 80s, maybe 90. And it’s interesting in storage, because if you’re completely full, that means your rates are too low. And you need a course correct. So you want churn you want new customers moving in and moving out. So ideally, we’re high 80s, low 90s, somewhere in there. That’s what we target
J Darrin Gross 38:44
in any sense of what the changing interest rates and kind of changing economy might do or that historically, what are your expectations with vacancies as economy changes?
JACOB VANDERSLICE 38:59
Well, you know, I’m a I’m a student of history. I majored in history in college, and we kind of were commenting before we recorded but it seems like as you as you try to look back and infer what’s going to happen in the future. Based on the past, it seems like these events that have happened lately are so different from what’s happened before the world’s changed so much the access to information globalization. So it’s really tough to look back and say this happened before now. It’s gonna happen again, given these conditions. But if the economy continues to soften historically, when there’s a disruption event, demand for storage increases. People are moving more often. They’re there, they’re maybe downsizing homes or they’re moving from a single family home to an apartment. They’re getting new jobs. They’re moving from high tax states to lower tax states, they need storage for a year. So generally disruption increases consumer demand as it relates to interest rates. We commented on this a moment ago, but of course value Have to go down eventually if rates keep going up and just can’t sustain. So interest rate increases mainly are affecting our distributable cash flow, we were financing an A for before, and now we’re financing at a six, or an our net income is going to be lower. So our cash on cash returns on a current basis are going to be lower too. But we all have short memories. We look at rates today, I think, oh man, there’s so high Well, relative to the history of debt and the US, interest rates are still pretty cheap. We financed a property in June of 19. And like 5.2%, when we bought it, and again, it’s pretty good rate. And we’re getting the same rates we are today lately. Or we were then as we are today on new acquisition, so we’re in the low to mid fives. But those go up to seven or eight. That’s going to be a material change and how we’re approaching our acquisitions and our capital stack.
J Darrin Gross 40:56
Now, it’s so true, I can remember the first home loan, I got seven and three eighths and I was doing cartwheels I couldn’t believe is the great rate. You know, now, holy crap, how do you afford anything? You
JACOB VANDERSLICE 41:07
know, that my parents gotcha, did I think they were like 16 or 17%? Or something?
J Darrin Gross 41:12
Oh, yeah. No, I was definitely a time. You don’t have to go back that far. I mean, I was I was, I was aware, but not not like it wasn’t coming out of my pocket. But I mean, you know, cyclical. And it just, I think that the one good, you know, good sign is if the Fed can build up the Fed rate, and keep the economy going. It does give you a relief valve if you need to, to, you know, get the economy going. You can you can drop the rate. But when you’re sitting at zero for as long as we were, I mean, it’s kind of hard to I mean, where do you go, you go to like, negative rates? And so I think that it’s untenable, right? Yeah. So I think that it’s, it’s, it’s healthy, what’s happening, it’s just, it’s the pain of change, I think, is really what we’re all kind of trying to figure out. So. But that’s, that’s, that’s, I mean, really, though, that’s the opportunity, that’s the other side of that, as I’ve come to realize is that the opportunity is in the change. If you’re looking at yesterday trying to go God dang, it’s not what it was, you know, it’s the the opportunities in that change, because there are going to be some people that want to get out regardless. The people that usually do well are the ones that get in recognizing the, the, you know, the opportunity, and the, you know, the price correction kind of thing. So, but if you don’t have any capital, then, you know, you’re you’re, you’re not going to be one of those. But no, it’s all good. Hey, Jacob, if we could like to shift gears here for a second. As I mentioned before, by day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And when avoid nor minimize our options, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests if they can look at their own situation, could be clients, investors, interest rates, the market, political, whatever you would like to, you know, or however you’d like to identify and recognize what you consider to be the biggest risk. And again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. Sure. And so if you’re willing, yeah, I’d like to ask you, Vanderslice,
JACOB VANDERSLICE 43:50
what has got a few thoughts here on the biggest risk? Yeah, risk is a subjective thing to a degree based on who you’re talking to. I look at risk as the as the mitigation of a loss of principle. So what is the story on this deal that would have to occur where we would see a loss of capital, and we look at that more carefully than we do the upside scenario. upside is a lot more difficult to quantify. But finding a story that creates downside is what we try to just eliminate. And having in real estate finance when someone crashes and burns. It is almost always because of a cashflow issue. It’s always a cash flow issue. There’s there’s certain circumstances where you can fail not because of cash flow, but you know, something maybe bigger COVID, for example, but we watch our cash flow very carefully, specifically in self storage. And when we buy a given deal, there are two risks to that to that acquisition. I think outside of things we can’t control interest rates and cap rates where rates going to be involved. yours where Cap rates going to be in five years, we don’t know, right, we can make a forecast we can be conservative. But we can control is our is our net operating income and and our revenue, we have control over that to a degree. But the two risks on a given storage acquisition, we believe are rents where rents today and where rents going to be, and is that revenue stream achievable and reasonable that we’ve written into our model. And secondly, it’s kind of getting in the weeds. But property taxes, I think, are a major risk. And property taxes and self storage are variable just like any asset class from market to market, they’re a lot higher in the Midwest than they might be in Denver. But because storage leases much like multifamily are basically full service, meaning the the tenant doesn’t pay the property taxes, those come straight out of the bottom line. So if you’re accruing for property taxes incorrectly, and you get reassessed, that’s going to be a material change in your net operating income as well as the total value of your property. So that’s something rents and taxes are something we really analyze very carefully. And to mitigate the risk on the property tax side, we accrue for a tax bill, that’s a worst case scenario. So that it is inconceivable the property taxes in the in the foreseeable future will ever go above this figure. And that’s what we approved for. And typically, we come in well below that figure, sometimes we get lucky, sometimes it just doesn’t get reassessed. We’ll do some creative transfer, things where we buy the entity versus buy the deal. But I know that seems kind of in the weeds. But if you think your property taxes are gonna be 100 grand, and then 140. That’s a massive Delta. If you put a six cap or a five cap on that 40k In noi, you’ve missed the mark on your deals value by lots of money.
J Darrin Gross 47:02
Yeah, no, I appreciate you emphasizing that, because I think that’s that’s something a lot of people, you know, you it’s really easy to look at historical numbers and assess the thing from left to right. And, and not recalibrate or really get a good sense of what the tax base and what what’s coming. You know, a lot of times I have gotten those notices about, you know, hey, guess what, you know, the there was a measure passed the bond bond measure passed, or whatever, and all sudden, the rate goes from here to there. And it’s like, you know, what, whoa. And so I’m guessing Do you, obviously, if you guys are looking at this, and that’s a big concern. Are there jurisdictions that you have recognized that are just too TAs are not tax, tax averse? is a risk too great to where you won’t?
JACOB VANDERSLICE 47:59
There’s more amount of risk is too great that we won’t buy, the seller is telling us no, the taxes are gonna stay here like no, they’re gonna go up by a lot. They don’t believe us. So we can’t do the deal. You know, one state that’s pretty, pretty rough is Ohio. There, you gotta be really careful about your property taxes up there. Illinois is another one, you’ve got to be just ultra conservative. And we we kind of quantify the risk of that tax increase with a couple different ways we hire third party tax consultants, depending on the deal. We’ll do our own in house analysis by calling up the taxing authority preflighting a scenario with them calculating the mill levy other property taxes in the in the sub market. So there’s a lot of ways that we kind of analyze that and mitigate that, that risk. But some markets are scary, and some deals are scary. And those are deals we just don’t do.
J Darrin Gross 48:50
No, Amen. All right, well, hey, Jacob, this has been great. Appreciate you taking the biggest risk question there and running with it. That’s, that’s great. Where can listeners go? If they’d like to learn more connect with you?
JACOB VANDERSLICE 49:06
They can email me Jacob@VanWestPartners.com They can go to our website VanWestPartners.com or hit me on LinkedIn at Jacob Vanderslice.
J Darrin Gross 49:16
Awesome. Well, Jacob, I can’t say thanks enough for taking the time to talk today. I’ve thoroughly enjoyed it. Learned a lot, and I look forward to doing it again soon.
JACOB VANDERSLICE 49:27
Darrin, I enjoyed it. Thanks for having us on.
J Darrin Gross 49:29
You got it. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN radio.
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