Can Self-Storage Strategies Thrive In The Current Real Estate Market?

Play This Episode

14 Votes

Today s guest is Ben Lapidus Ben Lapidus is the Chief Financial Officer for Spartan Investment Group LLC where he has applied his finance and business development skills to construct from scratch a portfolio of over 500M assets under management build the corporate finance backbone for the organization and organize over 200M of debt capital from the firm In addition to completing over 50 real estate transactions at and prior to Spartan Ben is also the founder and host of the national Best Ever Real Estate Investing Conference and managing partner of Indigo Ownerships LLC Best Ever Conference Code Use code INVEST for 300 off any ticket type at https www besteverconference com Show summary In this episode Ben Lapidus joins Sam to discuss the nuances of the commercial real estate market with a focus on self-storage and investment strategies Lapidus shares his expertise on navigating the current market the importance of robust business plans and the challenges of finding attractive yields They also talk about the Best Ever Real Estate Investing Conference detailing how it adds value for passive investors and the innovative strategies used to attract them ————————————————————– Self-Storage Market Insights 00 00 00 Introduction and Background 00 00 37 Current State of Self-Storage Market 00 02 03 Investment Strategies and Passive Investors 00 03 34 Conversion Deals and Opportunities 00 05 18 Shift from Office to Self-Storage 00 06 00 Interest Rates and Debt in Self-Storage 00 07 14 Pricing Mechanism and Market Response 00 08 36 Commercial Real Estate Market Overview 00 10 33 Alternative Investments and Portfolio Allocation 00 11 57 Best Ever Real Estate Investing Conference 00 13 46 Strategies for Attracting Passive Investors 00 15 41 Conference Organization and Team Management 00 18 28 Closing Remarks and Special Discount 00 20 16 Best Ever Conference 00 20 30 Contact Information 00 20 50 ————————————————————– Connect with Ben Web https www benlapidus com Connect with Sam I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns Facebook https www facebook com HowtoscaleCRE LinkedIn https www linkedin com in samwilsonhowtoscalecre Email me sam brickeninvestmentgroup com SUBSCRIBE and LEAVE A RATING Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts https podcasts apple com us podcast how-to-scale-commercial-real-estate id1539979234 Spotify https open spotify com show 4m0NWYzSvznEIjRBFtCgEL si e10d8e039b99475f ————————————————————– Want to read the full show notes of the episode Check it out below Ben Lapidus 00 00 00 – If your business plan can survive 2 or 3 years of negative leverage because you can take a low enough IRR that you can store enough cash on the side then it is a great time If your business plan is overly aggressive or you re trying to seek a very high IRR at a at a velocity of capital deployment that s unachievable then now is a bad time to make an investment You might want to wait 12 or 18 months to do so Welcome to the How to Scale Commercial Real Estate show Whether you are an active or passive investor we ll teach you how to scale your real estate investing business into something big Sam Wilson 00 00 37 – For those of you that don t know Ben Lepidus you need to know him I ve known Ben Now What Man What s been seven eight years at this point Yeah About to go about that I met you normally Ben I love to do a long winded introduction about how great the guest is You are a great guest I m It s my honor to have you on the show today but before I give you my own introduction I d love for you maybe just to come on the show today and tell us a little bit about who you are and then we ll get into it from there Ben Lapidus 00 01 03 – Yeah I m the founder and host of the best ever Real estate investing conference not the brand just the conference And was a founding team member of Spartan Investment Group which bought a half a billion assets under management in self-storage recently retired but have a long history of buying single family multifamily self-storage assets over the last 12 years recently or prior to that was in the adtech space learned a lot about big data started a study abroad company Costa Rica and have tried several other startups that failed So I m an entrepreneur at heart and can t wait to talk about whatever you want to talk about Sam Wilson 00 01 36 – Dude that s that s a whole lot I mean my gosh that s a lot of moving pieces there Most recently you were like you mentioned a a partner there at Spartan Investment Group where you guys bought an absolute ton of self-storage Why don t you just give us maybe a high level view recording this What Its end of February 2024 high level view of where self-storage is now and then maybe is what you see across the commercial real estate space as a whole Ben Lapidus 00 02 03 – Yeah So self storage still has incredible fundamentals When you look at the supply demand of self-storage it s gone from 1 in 11 households to one in less than nine households are leveraging self-storage or consuming self-storage just over the last 5 or 6 years That s an incredible shift in demand in a 5 or 6 year period simultaneously construction costs going up interest rates going up have made new supply difficult So the fundamentals that drive storage is still in a very attractive asset class That s on the consumption side on the on the the consumer side on the investor side investors have wised up to it So it s become incredibly competitive And the the spread between what you can get on the equity side versus what you can borrow on the debt side has been radically compressed and it now mirrors one of the major five food groups You ve got all of this office money which was the largest component of commercial real estate coming out of office And it s number one place to place it is self storage Ben Lapidus 00 02 59 – And that s just a lot of moving money So from an investment perspective the supply and demand isn t as attractive as it used to be So I think what we re going to see over the next two years is do rates compress faster than cap rates and do the supply and demand economics on the consumer side kind of create a skyrocket effect of occupancy and rental rates such that it s attractive enough despite the competitiveness on the investment side Sam Wilson 00 03 23 – Wow That s a that that that s an impressive impressive insight there So yeah I guess you know in short is now a good time to to be investing in self-storage Ben Lapidus 00 03 34 – Now there is never a bad time to be investing in self-storage To be clear it s recession resistant It s always going to go up because of those supply demand economics It s just is this the best time to generate the cash flow that you need to kind of cross the chasm if you re buying in a negative leverage environment And so it s really about your business plan Ben Lapidus 00 03 54 – If your business plan can survive 2 or 3 years of negative leverage because you can take a low enough IRR that you can store enough cash on the side then it is a great time If your business plan is overly aggressive or you re trying to seek a very high IRR at a at a velocity of capital deployment that s unachievable then now is a bad time to make an investment You might want to wait 12 or 18 months to do so right Sam Wilson 00 04 18 – Right What about what about that conversation with investors like as in passive investors How does that work when you re looking at deals that may be negative leverage I mean is that even a conversation that s being had Ben Lapidus 00 04 30 – It is And that s because you just kind of find a different investor profile as the yield moves from kind of value add to more opportunistic you have to find the investors who are willing to take the risk return ride with you at the end of the spectrum where those yields are achievable and attractive If you re trying to get you know a 6 cash flow with a 14 IRR on an asset that s 70 stabilized that s been in existence for ten years with no expansion potential that s going to be really tough Ben Lapidus 00 04 59 – But if you can find a conversion opportunity or the doughnut hole in a state that is booming with those supply demand economics working in your favor on the consumer side then you can achieve those 20 25 30 IRR on a ground up development or conversion deal or an expansion Sam Wilson 00 05 15 – What do you say when you say conversion deal What comes to mind Ben Lapidus 00 05 18 – Yeah conversion is just taking a space that is not used for storage today and converting it for storage purposes If you if you like like a Macy s a Kmart a Shopko and just converting it into kind of like how urban air I don t know if you ve got urban air where you are but I Here in Colorado there s an urban air chain which is like an indoor like pre-teen park for trampolines and stuff And they ve just been converting you know grocery stores basically into urban air adventure parks It s the same thing with storage Sam Wilson 00 05 51 – Same thing with storage Be it office Sam Wilson 00 05 53 – I know I m a passive investor in an office to storage conversion project right now Ben Lapidus 00 05 58 – Hotel to storage Yeah all sorts of things Sam Wilson 00 06 00 – Which is wild because you re looking at this They ve they ve converted it from office to storage and and just like you re saying the opportunity in this particular area was unbelievable I mean it s leasing up at like 30 or 40 units a month I mean it s just flying off the shelves as soon as they got their Co which was kind of kind of crazy to see So that opportunity exists You mentioned the money that s coming out of office and going into storage How are people even getting their money out of office I mean talk about something with negative leverage What s that look like Ben Lapidus 00 06 31 – I mean we re seeing gosh I m gonna I m gonna fail to come up with specific examples but we re talking like institutional level like CRO holdings tremble you know bam capital like those those size of organizations dumping their office assets or dumping their office up co partners and selling them off whether it s at pennies on the dollar or not Ben Lapidus 00 06 55 – And they are recalibrate or rebalancing their portfolio to not reinvest that into office but say let s let s find alternative assets Self-storage being the darling of the alternative asset space inside of commercial real estate Sam Wilson 00 07 08 – Got it Very very interesting What s that look like on self-storage right now Ben Lapidus 00 07 14 – That is just as attractive in self-storage as it was anywhere else And now that s a misnomer because nothing is attractive in debt I just I use that to say it is just as attractive as any other lending rate outside of the agency world So you re not going to ever beat you know government backed loans like you would get in housing But outside of that you can get self-storage Lending rates are akin if not better than than office lending rates today if not better than retail rates today you can still find like kind of the needle in a haystack Sub six low 6 interest rate Although the majority of what you are seeing on average when you make those phone calls or high sevens low eights and then you re kind of getting to the riskier stuff of nine ten and even double digits you know interest rates Sam Wilson 00 07 59 – Anybody doing long term fixed rate on that or is it all floating debt Ben Lapidus 00 08 03 – Oh sure Yeah You can find long term fixed rate either either by way of you know like doing shorter term or by doing a swap or some other derivative that that that creates that that fixed rate despite starting with the floating rate product Sam Wilson 00 08 17 – Okay Very very cool Have we seen maybe you ve answered this already and forgive me I m I m I m riding the short bus here today but have you seen seller prices come up as interest rates have also climbed or not Solid prices go down Rather like have we seen that that sellers become more realistic or is it still Ben Lapidus 00 08 36 – Yeah So So I drove the acquisitions team and was very familiar with that up until about 7 or 8 months ago So I ve started to fall off of my you know a thumb on the on the pulse of things But we haven t seen the correction that you would assume with with interest rates climbing Ben Lapidus 00 08 54 – So number one we ve only seen rental rates correct by 3 with all this inflation maneuver And that is incremental street rates not in place rates So revenue is still going up at self-storage consistently in the industry And you look at the rate level reporting revenue still climbs quarter after quarter after quarter The incremental customer rates might be decreasing But you ve got one month leases You can you can do existing customer rate increases after providing that discounted rate almost immediately if you choose to So we re still seeing rates increase So it s an inflation hedge So we haven t seen the pricing correction in response to the interest rates that you might assume Because you ve got investors coming out of longer term lease product like office like retail like industrial for the purposes of hedging their inflation and going into short term lease product like self-storage because they see the future potential of that inflation benefit So yes we we have seen pricing come down a little bit But now instead of you know pricing to a 4 75 cap rate on a T3 or maybe pricing to a 6 cap rate on a year two pro forma Ben Lapidus 00 10 03 – So we re just we re seeing a different heuristic to kind of come to the same pricing or margin of error pricing as we were just a couple of years ago Sam Wilson 00 10 10 – Right No that s very very interesting Thank you for taking the time to give us kind of a brief snapshot on where the self-storage industry is today and kind of what s driving the pricing mechanism behind that Certainly appreciate that Let s hear what your thoughts are on the commercial real estate market as a whole Like where is opportunity if that s still one that people are you know fighting tooth and nail over to get involved in Where do you see opportunity today Ben Lapidus 00 10 33 – Yeah I think commercial real estate just doesn t have the spreads that it did for the last decade I mean it was if you re listening to this podcast you probably have a sentiment that there was a time where raising capital was on the easier side of the spectrum if you wouldn t just blatantly say easy And that s because you could achieve like a yields an IRR just by consequence of of appreciation that was happening in commercial real estate in general Ben Lapidus 00 11 01 – that appreciation has evaporated as a result of interest rates climbing and maybe that appreciation will return if and when interest rates decrease But for right now you do not get the cash flow that you re you re used to getting after the last decade and a half you do not get the appreciation that you re used to getting after the last decade and a half So kind of commercial real estate wide it s just not a very attractive time to be in commercial real estate relative to yields that you can get in other places And you know modern portfolio theory suggests that up to 30 35 of somebody s portfolio should be an alternative assets with real estate being the largest segment of it About 9 or 10 of the average portfolio contains real estate So there s a long way to go for alternative assets to kind of climb to 35 to get to that modern portfolio theory number But there s a lot of other segments of alternative assets like precious metals operating businesses secondaries private equities that have not been tapped into nearly as much Ben Lapidus 00 11 57 – And I think that those yields are more attractive today than what commercial real estate offers And that s and that s probably going to be for the next 18 months at least Sam Wilson 00 12 05 – Well yeah absolutely And I m I m testament to that I mean that s what we re investing in right now is operating business simply because it is inflation resistant It s recession resistant like it s it s stuff that spins off cash flow at rates that commercial real estate just simply can t And that s like Ben Lapidus 00 12 22 – I m more interested in the activity of how the space is being used right right now than the than the value of the space itself Right As an investor mindset Right Sam Wilson 00 12 33 – Right Yeah absolutely That makes a heck of a lot of sense So you ve got you ve been through you know all of this here with with Spartan here up until you know seven eight months ago And what do you do with your time now like when you talk about these things and you think about okay alternative investments operating businesses what what are people doing with the space Like what piqued your interest today Ben Lapidus 00 12 51 – Yeah Ben Lapidus 00 12 51 – And the way that I found my way to the partnership at Spartan was through the Best Ever conference which I founded with Joe Fairless the year before joining up with with the guys at Spartan Investment Group And that that conference has been a North Star for me because I ve been building it to service me as an avatar consumer of the conference Who do I want to learn from Who do I want to meet Who do I want to be surrounded by And let s just kind of create all of the details of this conference to attract those people those speakers those sponsors those attendees And and I don t I don t know if you ve seen that consistently year over year Sam but you were there at the first year Every single speaker that I picked was somebody that I wanted to hear what they had to say personally like myself And that s still the case today We don t have anything to sell at the Conference We just want to create a community of like minded people who are intelligent are having a good time and want to collaborate with each other to get more out of their businesses and out of their lives Ben Lapidus 00 13 46 – and so that s that s the premise of the conference today And I m just kind of using the small amount of free time that I have after prioritizing my family and my kids which is the major shift that I made this year into growing and improving the quality of that conference and so a lot of our effort this year with the conference coming up in April April 9th ten 11 and 12 in Salt Lake City is to focus more on the needs of the the passive investor So as our conference has grown we ve attracted a lot of participants on the syndication side of the house the operator side of the house the people who have their their fingernails dirty with the real estate But the passive investor hasn t had as much emphasis at the best ever conference So we ve built a deal list site that we re going to be launching next week that allows all of the passive investors who are going to be in attendance to review all of our pitch slam competitors and all of our syndication sponsors deals in advance Ben Lapidus 00 14 45 – We re going to have a scheduling feature where you can without walking around the conference and being cultured upon You can establish one on one sessions with the syndicators that you want to get to know like and trust before putting your money in It is the number one place to show up and look in the eyes Hundreds of potential companies to invest your money into and not just in commercial real estate but into a growing number of private placement opportunities And so that s that s really our focus for growth this year is just making the conference useful and desirable for the passive investor which then of course makes it more useful and desirable for the syndicator who s looking to join forces with those passive investors in growing their portfolio Sam Wilson 00 15 27 – That s really cool I like that What what have been some strategies that you ve implemented to bring in that more passive investor The people like how how do you draw in that ideal clients The wrong word attendee how do you do that Ben Lapidus 00 15 41 – Yeah So I think the experiments that we ve done in the last couple of years are number one you know three years ago we tried out this pitch slam Ben Lapidus 00 15 48 – It s kind of like a TechCrunch disrupt where a panel of judges decides on who has the best deal of the year And the first two years was kind of pay to play and it wasn t a very good situation But last year was the participation by merit And you were actually a brick and was one of 12 finalists put up on stage And that got to compete for prize money of 600 000 by actual investors who are on stage And so we re going to be repeating that this year We had over 80 applicants this year and we have 12 finalists selected for the stage So that s number one Number two we ve been trying to partner with investor communities like IDC intelligent investors real estate community last year left field investors this year long Angle is another great investor community that we re going to be highlighting on our stage this year 506 group is you know Mark Robertson somebody that we ve highlighted on our stage before So trying to partner with investor communities number three is building that directory so that you can in the comfort of your home review and plan for your time so that you re not just kind of showing up and hoping that something good happens but rather you re reviewing materials and saying I actually have an interest in this Ben Lapidus 00 16 50 – I have an interest in a laundromat fund or a Texas vineyard fund Let me or neighborhood retail fund that only buys nine caps or a hotel conversion into a bed and breakfast fund or something like that Right We ve got all of these disparate kind of nuanced data center style as well as the traditional multifamily retail office opportunities that you could review But looking at them in advance and determining I want to interact with these people from the site that s a new feature as well as the scheduling one on one feature where you can kind of come up with your agenda as a passive investor in advance And we ve got a speed networking session that we ve never had before that only qualified excuse me accredited investors are allowed to participate in with prevented sponsors who are either on our pitch slam stage or sponsoring the event so that you can have kind of five minute curated one on one rapid fire conversations So those are some of the features that we re adding to the experience this year Sam Wilson 00 17 45 – Dude that s really cool I love that And yeah I ve been coming to the conference since 2017 And it s been it s always proved incredibly valuable So if you re listening to this and you ve not been to the Best Ever conference go check it out It is definitely worth your time You ll get way more out of it than you put in so yeah that s that s my plug My shameless plug as well for the best ever conference I have I have benefited from that Sam Absolutely man It s been a blast dog Well you know it s fun man It s kind of like homecoming Like you go back and see all your friends You re like hey man what s up I missed everybody it s been an entire year I can t believe it But you also have you know have created an environment where meaningful relationships relationships So if I could speak today are formed So that s that s very very cool Sam Wilson 00 18 28 – On the technical side of that I look at that conference Ben and I just kind of go my gosh like this is a ton of Work How How have you organized your team your people and your time to pull off something of that magnitude Because honestly I look at it from the outside and it seems like you ve done it pretty effortlessly Ben Lapidus 00 18 49 – But I appreciate that I you know the first 4 or 5 years did all myself on top of growing Spartan at the same time and you know we were just starting to have kids then so it was a little bit easier to do the multitasking right but around your 4 or 5 I got I got burnt out you know we were we had scaled it from I think the first year we had 170 people By year 4 or 5 we were at like 800 people Now we re this year it s probably not going to grow just because of the challenging macro environment and people having surplus budgets for marketing and travel what have you Ben Lapidus 00 19 19 – But we ll have over a thousand still and around that year I said you know what I we just gotta have to hire some people And so we ve built a team and now they re in their third year of doing this conference together And so they ve they ve just got a great rapport with each other and are capable of seeing the bigger picture that s being put in front of them the strategic plan that s being put in front of them and executing on that So I m I m very fortunate to be in a position where I only spend about an hour or two a week on that conference up until maybe a week beforehand And I can I can use all of my extra mental load to be creative with How can we improve the experience and offer more value to everybody participating Sam Wilson 00 20 00 – That s really cool Ben I ve enjoyed our conversation today As always it s a pleasure to get to chat with you I always feel smarter after those engagements so appreciate you taking the time to come on the show today Sam Wilson 00 20 11 – Is there anything else you want to cover here on the show Before we wrap this up It s just burning a hole in your mind Ben Lapidus 00 20 16 – Yeah I think we re going to have a special discount for your audience so I don t know what it is but I don t know if you know what it is but we re gonna have a special discount for your audience that you can put in the show notes and you can check us out at Best Ever conference com and I hope to see everyone there Sam Wilson 00 20 30 – Best ever ecommerce com Yeah check that out I will get that special discount for our listeners to the how to scale commercial real estate podcast Put there in the show notes You ll have to find the episode on our website in order to find that discount but it ll be there and I hope to see you all at the Best Ever conference as well So Ben thank you again If our listeners want to get in touch with you and learn more about you what s the best way to do that Ben Lapidus 00 20 50 – Yeah you can reach me at Ben at Best Ever Conference Sam Wilson 00 20 55 – Fantastic Thanks again Ben Great to see you Have a great rest Your day Ben Lapidus 00 20 58 – All right Thanks Sam Sam Wilson 00 20 59 – Hey thanks for listening to the how to Scale Commercial Real Estate podcast If you can do me a favor and subscribe and leave us a review on Apple Podcasts Spotify Google Podcasts whatever platform it is you use to listen If you can do that for us that would be a fantastic help to the show It helps us both attract new listeners as well as rank higher on those directories So appreciate you listening Thanks so much and hope to catch you on the next episode Click here to visit this podcast episode