Single-sector personal fairness actual property funds are usually not uncommon, however the majority have a tendency to focus on core actual property belongings. However Prime Group Holdings LLC has discovered success off the crushed path, focusing its funds on area of interest property varieties. Traders have poured $2.5 billion into its newest initiative, Prime Storage Fund III, centered on the self-storage house, blowing previous the fund’s $1.5 billion goal to achieve its arduous cap of $2.5 billion.
The providing is the most important personal fairness fund ever raised to completely to spend money on self-storage properties, in response to PERE. Prime introduced the closing of the fund Jan. 26, 2023. The commingled fund’s traders embrace sovereign wealth funds, public pension plans, college endowments, banks, insurance coverage firms, household places of work and foundations. Over 30 international locations are represented in its investor base. The fund’s base consists of each new and repeat traders from Prime’s earlier funds.
It’s the third fund the corporate has raised centered on self-storage belongings, with every rising in scale. Its first fund launched in 2015 raised $154 million in fairness and bought 67 belongings. Prime launched its second fund in 2017 and raised $706 million, which it used to accumulate 121 belongings. Thus far, its third fund has deployed 18 p.c of its capital and bought 63 storage belongings. General, Prime Group Holdings has bought $5 billion in whole belongings within the self-storage house totaling extra than22 million sq. ft.
“As a recession-resilient, need-based asset, self-storage affords its traders dependable money movement with little or no draw back, plus a number of confirmed strategies of making worth post-acquisition,” says Robert Moser, Prime Group’s founder, principal and CEO.
Prime’s historical past dates again to 1998 specializing in roll-up methods for area of interest actual property belongings. Its first investments have been within the manufactured housing and RV park sectors in addition to within the self-storage and multifamily areas. Prime Group Holdings was based in 2013 and started launching funds quickly after.
The curiosity within the Prime’s newest fund is inline with a broader development that’s seen traders which have sometimes focused different actual property asset lessons cycle into self storage, lured by the sector’s steady fundamentals and enticing cap charges.
“The client pool for self-storage belongings has expanded because the well being disaster started, as traders accustomed to different property varieties have engaged with the sector,” says Steven Weinstock, nationwide director of the self-storage division for Marcus & Millichap, working within the agency’s workplace in Oakbrook Terrace, Unwell.
In instances of financial uncertainty, self-storage properties have confirmed to be particularly enticing to traders.
“A lot of this cross-sector capital has come from multifamily traders, the place yields have change into comparatively extra compressed,” says Weinstock. All through these ups and downs, the cap charges traders settle for for self-storage properties proceed to be considerably larger than multifamily cap charges. “That bodes effectively for continued capital inflows.”
Sourcing offers in a aggressive market
Prime’s technique within the sector is to supply off-market transactions as a lot doable. It focuses on undersupplied markets throughout the U.S. and goals to streamlining operations on the properties it acquires via institutional administration by way of it’s in home full-service property administration operations. The aim is to take an asset class that—outdoors a number of the giant publicly-traded REITs—is fragmented. The house supplies Prime “with the chance to implement skilled and complicated managerial and operational protocols, in addition to leverage economies of scale in in search of enticing risk-adjusted investor returns.”
We proceed to determine alternatives to mixture and institutionalize possession and administration throughout the North American self storage market,” Prime Holdings CIO Douglas Kotelly stated in assertion. “We have now deployed capital from Fund III into belongings for which we consider we will execute value-add enterprise plans and greatest make the most of our administration capabilities. We look ahead to leveraging our crew’s actual property funding expertise as we pursue superior returns for our traders.”
The off-market pipeline might assist it discover acquisitions for the fund amid a broader local weather through which funding gross sales volumes have dropped dramatically amid larger rates of interest and tightening capital markets.
“We have now seen a slowdown within the variety of offers out there on market, as anticipated with the present financial atmosphere and coming off a yr with historic gross sales quantity,” says Scott Schoettlin, managing director with SkyView Advisors, primarily based in Tampa, Fla. “Initially, rates of interest moved at a sooner tempo than anticipated with no indication of how far they may rise.”
Cap charges for self-storage properties bought in early 2023 are 100 to 150 foundation factors larger than a yr earlier than, says Schoettlin. “To offset the upper value of capital, cap charges have moved up and costs have come down from historic highs.”
Marcus & Millichap additionally studies larger cap charges. “If we take a look at our present itemizing stock as in comparison with closed offers within the final 30 to 60 days, we’re seeing cap charges for brand spanking new listings starting to rise to excessive 5 p.c and offers are closing above 6 p.c,” says Weinstock.
Regardless of the latest uptick, cap charges for self-storage properties are nonetheless decrease than just some years in the past. Costs have risen almost 33 p.c since 2019, as extra traders and new potential consumers have been drawn to self-storage, says Weinstock.
Prime’s plan for navigating this market is to be conservative with its use of leverage.
“To that finish, we consider and purchase forward-looking rate of interest caps on our debt to hedge the chance on our belongings, which has us effectively positioned within the present capital markets atmosphere,” Moser says. Prime Group-sponsored funds are additionally usually lively for six to eight years. “We construct in discretionary extensions in order that we’re by no means compelled to promote throughout a down financial cycle,” he says.
Prime offered nearly all of the properties it acquired for Prime Storage Fund I in August of 2021. In all, the 67 belongings offered for a reported $750 million. A three way partnership of actual property funding agency Advantage Hill Capital, associates of personal fairness agency Centerbridge Companions LP and Center Crossing LLC, an affiliate of Singapore authorities wealth fund GIC, acquired the belongings, in response to the Albany Enterprise Evaluation. Fund returns have been equal to 2.8 instances invested fairness, the in response to the report.
The common “road rents” for self-storage properties are down 2.8 p.c in comparison with the yr earlier than, in response to Yardi Matrix. These rents have been nonetheless larger than they’d been earlier than the pandemic.
“Avenue charges have declined, however operators have centered on growing present buyer rents to attain sturdy income development,” says Doug Ressler, supervisor of enterprise intelligence with Yardi. “Self-storage had a powerful yr and is well-positioned heading into 2023.”
Robust demographics ought to proceed to assist self-storage properties. “Millennial and Gen-X is utilizing self-storage greater than another demographic,” says Weinstock. “Additionally the variety of new properties below development is declining as improvement prices enhance, creating much less competitors.
“Whereas rents could also be flat to barely declining, keep in mind that rents had catapulted in the course of the pandemic and they’re merely returning to extra conventional ranges as is emptiness and as soon as once more impacted by seasonality,” says Weinstock.