Self storage is one of a number of real estate asset types that can be complimentary to a portfolio with multifamily investments. However, there are key differences and considerations passive investors should be aware of when evaluating self storage investing opportunities.
Scott Lewis, CEO and Co-founder of Spartan Investment Group, joins the show to share why he’s bullish on self storage investing, and how it fits into Spartan Investment Groups overall strategy.
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- How Spartan Investment Group evolved from a residential flipping company to their current strategy of holding multiple CRE asset types and establishing a self storage fund.
- The investment thesis for passive investment in self-storage, particularly as a compliment to a portfolio with multifamily investments?
- What is attractive about self storage assets that are located in secondary and tertiary markets.
- What lessons Scott has brought from his time in the military to his real estate career.
- Effective strategies for adding value to an underperforming self storage asset.
- The three investment criteria Spartan Investment Group considers when exploring other asset classes to invest in, and how self storage meets them all.
- What some of the similarities and differences are between multifamily and self storage.
- How self storage has it performed historically, and where the supply and demand numbers land.
- Given the inflationary landscape we’re in, we’ve seen rent rates increasing, and the ongoing housing shortage putting upward pressure. How an inflationary landscape with rising interest rates is affecting self storage.
- How debt is typically used when acquiring self storage assets.
Featured On This Episode
- Can Self-Storage Performance Strength Last? Here’s an Outlook for the Rest of 2022 (Inside Self-Storage)
- No Dividend Hike? No Problem, Why I Love Public Storage (Seeking Alpha)
Today’s Guest: Scott Lewis, Spartan Investors
- Spartan Investment Group (Official Website)
- Spartan Investment Group on LinkedIn
- Scott Lewis on LinkedIn
About The Multifamily Investor Podcast
The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses passive investment offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.
Scott Hawksworth: Hello, and welcome to The Multifamily Investor Podcast I’m your host Scott Hawksworth and today we’re gonna be talking about self storage and multifamily, and maybe how it’s a complimentary asset class for folks interested in passive multifamily investments.
Joining me to share his story and offer insights on self storage is Scott Lewis, who is the CEO and Co-founder of Spartan Investment Group. Scott, welcome to the show.
Scott Lewis: Thank you Scott glad to be here.
Scott Hawksworth: Well, thank you for being here, as I said, we want to talk about self storage, but you know first off, as I was looking at Spartan Investment Group and what you guys, do you started off as a residential flipping.
Company and you’ve since evolve from there, can you talk a bit about that evolution and and kind of how you got to where you are today.
Scott Lewis: Yeah it’s a pretty good story of our kind of our genesis we did start flipping houses and doing condo conversions in DC.
And we just it wasn’t for us it wasn’t in our DNA we weren’t great designers on the residential space and it’s just not something that we were good at.
So around 2016 we used a process, called the Military Decision Making Process. I am an army officer.
And that process allows you to make decisions in a complex and ambiguous environment and myself and my co founder Ryan, we don’t come from real estate we don’t come from the investing world.
We came from a completely different set of skills, so the real estate environment, the commercial one in particular was a complex and kind of ambiguous environment to us.
Sure, so one of the things that that process has you do is it has us establish evaluation criteria very early on.
So that when you come up with different courses of actions things that you can do you have a set of criteria to evaluated against so for us what was really important to us moving into the commercial space was easy to maintain.
easy to operate and easy to evict we call them the three e’s internally.
So when we looked at the different courses of action and think course of action, like different asset class multi family office industrial storage whatever petting zoo.
So all of that stuff was run through those evaluation criteria and the most important one for us was easy to evict we have a belief inside a Spartan that a contract is a contract and we don’t want the government to intervene to tell us what we can and can’t do with enforcing our contracts.
Right, we believe that if we give you a safe, secure space to store your stuff you owe us money that’s a contract and if not, then, then you should move on to wherever you need to go.
So that was number one easy to maintain was number two for us and then easy to operate with number three so when you look at the storage space it’s very easy to evict.
very easy to maintain a bunch of garage doors and steel buildings.
easy to operate, not so much it’s very much different than you know even the multifamily space, which is the closest one to it, but very, very different from retail very different from a.
Industrial and the triple net space not quite as hard as hotels or rv parks, but definitely not the easiest one so that’s kind of how we made the pivot to self storage.
Scott Hawksworth: I love it and I think that’s such a good point you know, obviously we’re big fans of of multifamily here, but those are some of the challenges and especially if it depends on the market.
You know, some of these markets where there may be less friendly to landlords so it can be harder to evict and then we of course all through coven.
A lot of those you know regulations coming out and saying Well, no, you can’t evict and that that is one of those negatives there, and so what you’re saying is is, at least for that box for self storage, that was a big one, for you guys right.
Scott Lewis: It was and in multifamily is is one of those core assets that’s just it’s an amazing play right like you guys have had this fantastic growth like even over the last couple of years and even through Kobe right.
it’s a classic asset class and we invest in multifamily we just don’t do it.
ourselves, we we invest with good operators on the side because it just did the operations side of it didn’t fit our evaluation criteria, but we love it as an investment.
So it’s one of those things that eviction was pretty big for us and for storage it’s.
You don’t pay for 30 days we lock it you don’t pay us in another 30 days we sell all your stuff and empty the unit it’s really that simple, because.
It how many cover government’s agents care about that piece of construction paper that your children glued macaroni to that you’ve saved yours right like No one.
Scott Hawksworth: Right it’s just kind of not on their radar at all.
Scott Lewis: don’t care.
that’ll rocking chair that like your grandparents here with flowers on it and a ripped like armchair because the cat ate it.
do not care about it.
They did all right.:
Scott Hawksworth: So Okay, so you said okay so it’s got easy to evict.
You Ted easy to maintain easy to manage, he said that self storage, I believe it was easy to maintain, you said that.
that’s a little trickier could you speak a bit more to that aspect of self storage where it’s it’s checks, all these boxes, but maybe it sounds like there’s a bit more to navigate there.
Scott Lewis: yeah there’s like when you think about the maintenance side of it that’s one of the more simpler things i’m most of these are metal buildings occasionally there’s elevators in them, and some of the new class a stuff, but there are a relatively simple structure.
Right, the trickiness to unpack is the operating thing.
Right, the operation is this is, this is an operating business right like we have tenants turning over.
Sometimes monthly the average tenant rate is about 11 months on some or longer right, we have some that are in there for 30 years.
That have their stuff in there, we have stuff some that are in there for one month, but you have to constantly be marketing and you have to constantly be worried about your customer experience from.
From a non residential living perspective and in that perspective it’s similar to a hotel where you have.
People coming in and out on a regular basis it’s not as operationally intensive as a hotel.
But it’s definitely more than just say a triple net lease where you have an office tenant and the guys like hey the air conditioners broken your responses well that’s your problem it’s a triple net lease.
So it’s not as easy as there but it’s definitely an operating business there’s it’s very hard to be a passive owner, there are third party management options out there for sure, but if you’re going to own it yourself, it is very much an operational business.
Scott Hawksworth: That makes sense to me and I guess i’m curious you know, speaking of things like turnover.
We always say when we talk about multifamily about how it’s just the fact that people need homes, they need housing, they need to live somewhere.
And self storage you do need that that can be necessary, but I could see how maybe some people might decide, well, I want to move my stuff over here now i’m I don’t need this anymore i’m just gonna get rid of it, do you kind of experience that, as part of maybe the turnover.
Scott Lewis: We do it’s not that much though you’d be man like loss aversion.
that’s huge people value their stuff and it’s not only that that’s part of it right there’s there’s part of folks storing you know boxes and nonsense in there, for years, but there’s a lot of other uses for self storage and i’ll give you some examples.
Here we have a large on self storage in Fort worth it’s actually a converted macy’s like the escalators are still in.
It out it’s, but what we did with that is it’s in a great place it’s in a mall.
And we have converted some of our 10 by 15 and 10 by 20 units so think 150 square foot or 200 square feet.
into little office spaces, so people who are independent accountant or something like that come in there and they can.
roll up the door and there’s lights in it, and they have a place to work away from their home.
So it’s still a small little office space, so you can get the same stuff that we work and their coffee machine is definitely snazzier than ours at rich and rich marsh self storage.
But at the same time it’s six or $700 a month that we work for hundred square foot office versus 100 bucks a month for your office at our storage facility.
So it’s definitely a more valued play, we have some customers that are across the street from some of our facilities that are in a retail shopping Center.
So think retail square footage like 25 $30 square foot triple net storage, if you assign a triple now that’s not how we do it, but if you assign a triple net it might be.
1112 $13 a square foot, so those those retailers are using the space for inventory management which is non revenue generating space.
At say $13 a square foot and then using their entire retail space for revenue generating activities that’s 25 $30 a square foot and then kind of playing on the delta there.
So there’s a lot of different uses for it.
Scott Hawksworth: wow I mean, I think that that right there kind of underscores what you’re saying about the the opportunity with self storage and and the value there.
I want to talk a bit about markets because you know, certainly in multifamily the market is so important, and I want to get this right, you your fun focuses on secondary and tertiary markets.
you’ve got assets in places like silt Colorado i’m looking this right here sandy Oregon, what do you like about these types of markets for self storage and I guess, could you just speak to the sort of market considerations when you’re looking at an asset like that.
Scott Lewis: Absolutely it’s it’s it’s funny you picked those two assets right there are words that.
Scott Hawksworth: yeah that’s exactly what I was like.
Okay what’s good about those.
Scott Lewis: sandy Oregon outside of your major metros like la or New York right let’s take those off the maths take the top 50 MSA is off the map.
Sure sandy Oregon has one of the highest storage rents in the country.
it’s it’s 30 minutes outside of portland and it’s.
Okay it’s by far, one of our best markets by far silk Colorado people who, what, when where is still Colorado good question on the western slope.
We click we’ve raised the prices on that facility multiple times, no one’s leaving and it’s in a rural area, so when what makes a good market for storage is it’s there’s some art to that science out there and how people are using storage.
fun fact about 65 70% of people that that have a storage unit have a basement attic or garage.
Scott Hawksworth: mm hmm.
Scott Lewis: So it’s it’s one of those things that we, like the secondary and tertiary markets, I mean we’re a mid market operator we’ve got about 60 stores right now.
which puts us in the top probably 30 operators in the country, but the big guys like the public and extra space are really big so when we look at that trying to go into the primary essays with with publicly traded reads is is is a bad idea.
Like you know, David slingshot may not necessarily get the Goliath right in that regards so we like to secondary and tertiary markets, a.
We won by our operating environment changing right with coven a lot of people did move out of the cities to these these smaller markets.
So the populations are increasing their and storage demand like anything else is directly correlated to the population.
And in those markets, we can be the best operator in those markets, it would be very hard to be the best operator in Denver or Los Angeles, because the rates are there.
So that’s why we did that and what makes a good market it’s all over the place on on on the storage side there are some markets that sharpsburg Georgia.
1440 minutes southwest of Atlanta it’s like Okay, this will take a good market I don’t know if it’s a great market but it’s good looking storage facility for sale, we got it at a value we’ve raised the rent by like 60% in two years 98% full.
And they don’t know where.
literally in the middle of nowhere it’s like on a main road in between two towns, but there’s no population Center on it whatsoever so it’s even surprised us so it’s really one of those things that it’s it’s it’s a very, very, very.
Big blend of art and science to the feasibility of trying to figure out what’s a good market.
Scott Hawksworth: Absolutely and i’m just as you’re kind of going through that I wonder, is it the kind of thing, where I don’t know where.
The cell Colorado exactly is in relation to things like skiing and all of that is that the kind of thing where oh you look at what are the activities that that folks are doing in these areas.
Is there value for you know, storing, whatever their equipment is put put whatever else they might need there is that the kind of thing to that you sort of consider when you’re looking at markets like this.
Scott Lewis: It is gotten on the western slope there a it’s hard to build out there because it’s in the rocky mountains and be as you as you kind of come to the to the peaks right between the eastern and western slope those towns get really restrictive really fast i’m in vail Aspen all those.
All those very scary is that self storage is not exactly something that they love so when you push out to the periphery, which silt is silt is probably about an hour from Veil.
And it’s actually near a town called glenwood springs it’s about an hour and 15 minutes or so from Aspen so a folks can definitely use it in route to store.
On you know, whatever they’re storing there and in regards to recreational activities and it’s.
Even in even in the surrounding area there’s not a lot of housing or anything else, like that, so people are when you look at storing things and garages and advocate and whatnot that’s really what drives that.
Scott Hawksworth: Absolutely just in general, you know you were talking about those sort of those three criteria that you guys have for your investment criteria.
And you lead with talking about your military background and, as I was looking through.
You know your guys materials, I was not surprised to find out that you did have a military background, because there was this sort of organizational approach.
I guess, could you speak to what lessons you’ve brought from your military career to I guess real estate in general and beyond just those those three sort of big you know points you have there, what else from an organizational and maybe strategic standpoint.
Scott Lewis: yeah there’s there’s probably three main things on number one is planning.
And part of planning is is assessing your operational environment, as I mentioned i’m an officer and I was an infantry officer, so I lead a lot of combat patrols in Iraq and.
through all the training and everything that would that would teach how to to assess and operating environment plan, a mission and then.
Then actually execute that mission, and with that execution, be able to build plans that roll down to the lowest level to the to the you know the private that needs to be executing out there.
And so that that.
That a level of discipline with planning and training and execution and education across it I would put my ability to plan against anyone out there anyone.
Especially non military folks.
On that that’s been really helpful, the second is risk mitigation when you’re in the military every everything you do has an associated risk mitigation component.
Because everything you’re doing you could end up making for me, I was in the infantry prior to the integration, so when I speak to all of my man that’s what it was at the time.
If I made a mistake it’s like somebody lost a brother Father son husband right so that level of risk mitigation was was just drilled into you as an officer to plan and think through those risks.
and use tools, like the pre mortem which helps you identify risks and failures before you start so that you can mitigate those risks before you even try something new.
And then also just to understand like how how and when to bring up and down your risk quotient and in the military that’s generally risk the vehicles are risk to soldiers.
That you’re out there, trying to accomplish your mission, and then I think the second thing is culture.
And that’s probably maybe one of the more important things at Spartan we really take a whole life approach to our vision for the company.
And we really try to like understand our team, personally, as well as professionally because we are not an easy place to work for um we are fairly demanding environment, we are not tolerant of of folks not meeting the standards at all.
We do not, we do not keep people on the team, we are not a family business, we are a team, which means there are no cousin at ease parked in the driveway like an.
rv into your sewer that doesn’t exist.
Right so with that culture, you also have to take care of people personally as well if you’re going to ask a lot of them, you have to help them achieve their personal goals.
And to do that, you need to create a culture of caring and awareness and I think if you were to ask the spark team that’s probably what it is it’s the same with our investors, we raise all of our money through retail capital right now and.
We get to know our investors deeply because we want to be able to help them grow personally, as well as professionally through their investments with us.
Scott Hawksworth: I love it, I mean I think that’s that’s so powerful and and it’s clear how you have applied that to your success your company’s success there.
You were talking about risk assessment and I think that’s such an important thing to really dial in on, especially as we look at the the larger economic landscape, right now, and I know passive investors.
are looking at we’ve got you know inflation out of control we’ve got rising interest rates we’ve got you know ongoing supply chain challenges just general economic uncertainty.
got worries about recession if we’re not already in it it’s a lot and i’m curious how.
Is that impacting your strategy and really The self storage space, I know, when it comes to multifamily there’s a lot of.
focus on, you know folks are thinking about debt differently as they’re going into assets we’re seeing lots of you know rent increases and things like that, but i’m just curious, how is that impacting self storage and what you’ve seen.
Scott Lewis: that’s one of the great things about self storage is we’re often touted as a recession resistant asset class for a couple of reasons we have very, very dynamic pricing our pricing can change by the hour it’s very it’s very similar to the airlines.
If you show up to a facility with a truck full of stuff.
it’s gonna be a lot different price, and if you buy online and you reserve unit 30 days in advance, we can do price increases whenever we want.
So if we wanted to do it every single month we could do that not fantastic from a customer experience perspective and probably would Royal our customers and we lose some of them.
But our street rates can move as fast as we want them to move so with that we can track inflation pretty fast.
Other than hotels.
And rv parks and some of the more like.
A kind of travel real estate then we’re probably the number one able to track with inflation debt and that’s doing the same thing to us than it is to everybody else it’s all wonky out there, right now, right like.
The seller expectations haven’t caught up to the debt markets, which are bananas, right now, all over the place.
That is a little bit harder for us and, probably, it is for multifamily because there’s no agencies loans or lending available for self storage.
Self storage a little less understood, then, then you know the big four food groups out there, so the lending environments, a little bit tougher for us and we’re definitely experiencing that we’re looking at buying deals for cash and then putting that on them later.
So it’s it’s definitely affecting us but we’re pretty resistant we haven’t we’ve we’ve had the best lease of season we’ve ever had.
on it, we saw us there’s there’s been better results users, but in Spartans history, you are going through the best lease up season we’ve ever had right now.
One of the things that really helps with self storage versus the other asset classes, you will get multi family rants and I don’t know what’s your average 2000 bucks a month right now across the country, maybe.
Scott Hawksworth: Close to that yeah that is.
Scott Lewis: A lot.
My mortgage is 20 $300 a month.
So why it’s pretty crazy.
So sorry 100 bucks a month.
And when you look at that that’s that’s probably one of the reasons why we saw a very, very low kind of delinquency uptick during koga because.
I mean, some of our storage is some of our 10 by 10s and more of our rural markets are 60 bucks a month it’s like it’s like I don’t know three coffees at starbucks.
Right, so when you when you look at that.
Coupled with the fact that if you don’t pay us, we will sell your stuff.
that’s going to happen it’s not an F it isn’t like we have an automated system that does it, so the lower price, plus the ability to recoup through the lean and auction process in the eviction process.
Really kind of motivates people to pay, and then the second thing if you think about it a 20% increase like think of the value that that was generated and your multifamily asset so let’s just say say down the fairway you got I don’t want to do hard math it’s $2,000 a month right.
Scott Hawksworth: there.
Scott Lewis: it’s a $400 a month increase a 20% increase on $100 storage unit 20 bucks.
Three more starbucks so when we look at that the ability to raise rents in a fashion, that is not throwing the frog into the boiling water, because it is so low on on.
The absolute dollar amount that’s being passed on to the customer really helps us be able to push value in our facilities in such a way that.
percentage wise, we can we can make some really big gains, obviously, the absolute dollars in multifamily are way way bigger than in self storage, but the percentage gains, we can move there faster.
Scott Hawksworth: Right yeah and and also again to sort of underscore your point there.
As things are as the purse strings are tightening you know and and economically, people are looking to you know make cuts.
to sort of protect themselves you’re going to be pretty low on the your your they’re not going to cut yours, first because they want to keep their stuff and they’re going to cut the starbucks first or something else right.
Scott Lewis: yeah and you know it’s funny my wife and I just did a kitchen renovation.
Oh, my God we moved our kitchen and I wanted to kill someone.
Like the thought of like go into a storage unit and move it a bunch of stuff you’re like I don’t even know why I have that stuff.
In the first place.
Scott Hawksworth: I just want to stay there.
Scott Lewis: Oh, my God it’s it’s in with auto pay.
it’s like I don’t know 100 bucks hit your credit card every month.
set it and forget it right that’s, this is one of those things that like someday someday that piece of construction paper that we talked about earlier that your mom has an a box somewhere in my mom does to like and will become very valuable, so you certainly could not get rid of that.
Scott Hawksworth: Exactly someday.
someday i’m gonna it’s gonna go on eBay and.
Scott Lewis: yep someday when when when your son or daughter is this like crazy artists this macaroni construction paper is gonna be worth millions, I thought.
Scott Hawksworth: that’s where it is that’s where it is.
So you’ve been you’ve been talking a lot about you know how nimble you can be in terms of pricing raising rents.
And you know the creative ways, where you can add value to to one of these assets is there also do you build them out in terms of adding additional units is there just expansion that can take place there is that part of your strategy as well.
Scott Lewis: It is most of the most of the properties that we are purchasing, we do have core plus properties that that.
may or may not have an expansion component to it, it may just all the operational upside which is operating a little better from the mom and pop owners that we’re buying it from.
But the vast majority of our value add plays that are kind of the five iron right down the field, the fairway for us do have expansion components.
And that’s anything from adding you know nine or 10,000 extra square feet of just a single metal building that you would think of whenever people envision self storage.
To adding a 40 or 50,000 square foot multi story class a and the front of a dilapidated property to really kind of change it from call it a B minus two and a minus asset.
Scott Hawksworth: i’m curious what How did the I guess development timelines for those types of projects compare when you look at that versus something like multifamily where.
You know folks are doing value add rhinos and then they want to make sure they stabilize and there’s usually it’s two three years, something like that i’m just kind of curious.
In terms of the timeline specifically for those who are passive investors in there they’re thinking okay well when when is this going to start to stabilize and and start returning some cash to me.
Scott Lewis: it’s that’s that’s a tough one it’s not it’s not dissimilar than than multifamily there’s a lease of season, or at least have timeframe, just like anything else.
The development time flame can be similar to multifamily multifamily that everybody wants multifamily and there was no I shouldn’t say that most jurisdictions want multifamily right because they want additional housing.
Right, very few jurisdictions want storage, so it is a little bit more of an uphill battle to get a self storage and titled.
Through the process.
it’s a much simpler build so our build timelines are pretty pretty sure you can we did we did a 90,000 square foot class a like very, very, very high end build in a suburb of Seattle and it took us took us four years to entitle it, but that was a whole nother story with moving wetlands.
There were hippie and drivers, there was a there was a church that that maybe wasn’t as friendly as they should be keeping PC on this call.
So they’re there that that one was sporty but that took us about 14 months to build 90,000 square foot of class a very high end storage.
Scott Hawksworth: I see so so what you’re saying is is maybe some of the biggest challenges, you might have to navigate that are maybe a little different than multifamily is just sort of the the appetite for that and sort of the the paperwork side, so to speak.
Scott Lewis: I bet you are challenges i’ve never developed multifamily so i’m kind of speaking out of turn here, but I would guess that when you look at horizontal development versus vertical development.
or I would guess our struggles are a little bit more on the horizontal than, then the vertical from an appetite to do it.
Now it just line on multifamily is definitely a lot harder because that’s where people are living so that, like the elements that go into that designer are far more I not that many people care about what the inside color of their storage.
Not being a yellow.:
Scott Lewis: cinderblock Gray, like okay i’m good right so when we when we look at that it’s sometimes there’s a challenge the flip side is it’s pretty fast to build I mean we can build.
I think it’s 6000 square feet, a week can go yeah six I think it’s 6000 square feet per week can be erected in the metal no way multifamily can track with that it’s just it’s far more complex construction.
Scott Hawksworth: Right so once you get there it’s it’s then okay boom, we can do the.
Scott Lewis: kitchen it’s pretty fast.
Scott Hawksworth: Have you seen any challenges with materials, because I was talking earlier, we know there’s all sorts of rising prices and supply chain issues have you seen any of that you know complicating when you do get to construction.
Scott Lewis: materials have been costs like everybody’s getting whacked with the same cost right.
Right, mostly steel so it’s it’s.
it’s gone kind of up and down where where we’re seeing most of the delays which will hit everybody is the.
The civil trades, like the dirt movers the concrete, especially because we’re in some of these secondary and tertiary markets and they’re not huge jobs.
So not not everybody cares about coming out and doing a 10,000 square foot building for 50 grand or whatever it is right, so.
With with the kind of the absence of the trade worker in our general ecosystem here across the board.
And the government really kind of turning on the spigot a little bit with some of the infrastructure projects that are coming on.
they’re going to pay a lot more so we’re we are struggling on that side of the House more on the Labor side, then i’ll say the material side we’ve got some material delays here and there, but.
we’re not in the multifamily space where we’re waiting months and months and months for windows and appliances and.
And things like that that are that the value chain, or that the supply chain is external to the US, most of our stuffs here some of the steel coming in from from outside, it was a problem for a little while but not much.
Scott Hawksworth: Right right now in the multifamily space, you know i’ve read about stories of you know, third party managers and folks trying to.
get a building open to start running it out and they’re you know going around the city going to home depot just like please just give us give us up and we need up and see.
So absolutely and and I also have heard that the Labor side is has been a challenge on you know multi family as well.
But I can see how, especially if you’re in some of those markets where you know the pool of Labor just isn’t as large as some larger markets that that could just be a little trickier.
Scott Lewis: In the margins on our projects are probably maybe maybe a little bit lower on than they are in the multifamily side, just because of sheer scale than that you know the industrial you’re doing.
A big storage build is 10 or 15 million box right on the on the development side that’s like eight units in multifamily.
So when you when you look at it on the multifamily side that the.
numbers are bigger the budgets are bigger so they can go after a little bit like the jobs are bigger so that the construction companies are more interested in that, and then smaller storage deals sure sure.
Scott Hawksworth: i’m wondering if I could put you on the spot and have you really make the case for someone who’s a passive multifamily investor.
They they understand it they’re passionate about it and they’re thinking Okay, I want to, I want to you know grow my wealth, I want to find other opportunities, why is self storage such a great potential compliment in a portfolio to multifamily.
Scott Lewis: And you said a great a potential compliment, we never advocate people switch to storage from a multi family portfolio, we always advocate to augment your portfolio.
And this is it you know when we are, we are bound by slightly different economic factors than the multifamily guys the industrial guys the retail guys different things plan our market.
And when you look back through covidien you look through back through the great financial crisis self storage was pretty stable.
On during the great financial crisis there’s only one asset class that had a lower bike recapture eight from the banks, and that was medical office.
Otherwise storage was really stable through that and that’s the stickiness factor of storage.
When when you’re looking at multifamily there’s some risk that the class eight folks go to the class B class be goes to classic I fee goes to D right as as as money comes down.
there’s not a lot of value in doing that in storage, because the amount that you save moving like from one unit to the other.
it’s just not that it most people don’t jump from one storage unit to the next every single year looking for a better deal that’s generally not a thing.
So our I think our customer base can be a little bit more stable in turbulent times so it’s a really good augment and self storage is it cash those pretty well.
So it’s a great augment to you know, a portfolio and multifamily we have a lot of folks that do that that just augment those multifamily returns with storage returns, as well as just slightly different economic factors in play.
Scott Hawksworth: Right and kind of to your point, you were talking earlier about you know your kitchen in terms of people trying to move down or something that’s like man that’s a big headache to say 20 bucks maybe or something.
Scott Lewis: I think I read a statistic that people would rather go to jail than move.
Scott Hawksworth: Yes.
Scott Lewis: I look at my garage that I have to unpack this weekend, because we just finished the kitchen renovation super stoked about it.
Like i’m like.
that’s unpacking and that’s like I just don’t want to do it and it’s in my garage and go anywhere on but that’s it, there is a certain stickiness factor to.
there’s a stickiness factor and kind of have a below the cognition factor of it’s on auto pay 7080 bucks a month it’s not worth my time going into this stuff.
Scott Hawksworth: i’ve got i’ve got all that old furniture, whatever it might be there it’s there I know where it is OK.
And i’m going to move on and focus on other things I think that’s a that’s a really great point you’ve really summed it up well Scott, in terms of how it can complement that kind of portfolio and how I do see them as you know, connected in a way, and and again very complimentary.
I wanted to ask, because your portfolio does can say consists mostly of self storage, but you also have some rv park assets, how do these assets sort of compliment the overall fun strategy there.
Scott Lewis: Great question those rv parks are some legacy assets that we that we purchased for good cash flow that we’re really good opportunities to purchase some on there in the West there in the West Texas in the permian basin.
And one of them, even through the pandemic it’s on levered produced a 6% return to the investors, the entire time even all during the the.
Oil stuff that was going on, when oil was negative $30 a barrel, and everything this thing just kept Peter and along.
Again, those are legacy assets it’s not something that we’re focusing on.
it’s one of those things, though we have when you look at our portfolio it’s not highlighted because it’s not they’re not mainstays the portfolio, but when when we’re buying these portfolio of storage is.
they’re generally put together through a mom and pop family over years.
And they come with all manner of stuff so we have office industrial chicken wings, we have we had a car wash that we sold, we have some mobile homes here and there, we have a couple residential houses that have just.
It they just come in with the portfolio, so we operate them, we have some we have some FLEX place warehouses, and one of our portfolios in Florida.
So we’re actually operating a number of different asset classes, you know multi family, but a number of different other tan gentle I asset classes that often gets smashed together with storage and they’re just very small parts of our portfolio.
Scott Hawksworth: Right and, and I mean if it’s a good asset it’s a good asset right.
Scott Lewis: that’s right so some of them will sell off eventually other ones are just there they’re producing cash flow so it’s triple net oh in it’s not big big stuff it’s little spaces so it’s not a high percentage of any of the cash flow that’s coming in, and so we just manage it.
Scott Hawksworth: Speaking of you know, selling off and assets when it comes to self storage and obviously with multifamily.
The exodus is huge and that’s where a lot of folks are looking to what’s your sort of overall strategy around exits when it comes to self storage.
Do you find that a lot of these are just you know just hold hold hold or do you have different sorts of plans for that i’m just curious how that that sort of varies.
Scott Lewis: Our strategy can be summed up in one word optionality part of planning is ensuring that you don’t go into a plan with a preconceived notion of what the right course of action looks like for executing that plan.
So when we say optionality we intentionally do not have exit plans for individual facilities.
And some investors, maybe I well those guys are just making some stuff up because they don’t want to think through it that’s wrong like unequivocally wrong if anything I plan like how i’m going to brush my.
Scott Hawksworth: teeth in the morning.
Scott Lewis: right away, it comes from a strategic planning perspective that if you go in.
With a preconceived notion to what course of action is the right one, you will you and your team will suffer from both confirmation bias in Groupthink.
So when that happens, you can completely missed the right opportunity for the one that you think is correct, so for each one of our facilities, we have a business plan right.
Our general thing is, we don’t want to necessarily sell everything, but when opportunity knocks or.
or there’s an opportunity that we didn’t see we’re going to capture it, we have two facilities for sale right now.
That are out there, because it wasn’t our plan to do it, but when we got in and operating them, they were i’ll call it C plus B minus facilities.
And they’re not co located with any of our other facilities and they came in, with a portfolio.
So the portfolio had some really good assets and then it had these assets that are good assets they’re just they’re not great, for a national operator because they’re not co located with other things, so we can’t leverage economies of scale.
Right, so we decided Okay, these two assets we’re going to carve them off we’re going to sell them separately.
To operators that are probably local maybe smaller mom and pop operators that may operate these themselves because they can get better value out of it versus a national company.
So that’s one way we have we have folks asking us for different parts of the portfolios, so we intentionally do not have those plans set in stone, because we want the optionality to execute given the operating environment that we have to the best for our investors and our team.
Scott Hawksworth: I mean, I think that’s such a great way to look at it and and I, I can see how, if you went in and you said okay well our plan is to exit.
You know, in whatever several years, this is the thing when you have all those decision points or the factors change, you could miss something if you’re just laser focused on what we’re heading towards the exit.
Whereas if you keep those options open, you might be like hey actually we’re going to hold this.
or we’re going to do something else, I think that that is an interesting perspective that maybe not not everybody has when they when they’re approaching assets, whether it be self storage multifamily something else.
Scott Lewis: there’s a really fun game that you can play at a party there’s a psychological experiment, if you type in gorilla basketball to YouTube there’s Are you familiar with it.
Scott Hawksworth: I am familiar with this, but please for our audience.
Scott Lewis: So so for the audience there’s a team and white T shirts and black T shirts in the in the edict is to count the number of passes between the team.
So i’m going to ruin it for you and for everybody, but you can really dazzle your friends is there’s a guy in a gorilla suit that walks in and pumps his chest and walks out so at the end you’re like how many passes did the white T make it’s like I don’t whatever.
yeah 20 30% of the people never see the gorilla and it’s because there’s a psychological concept called inattentive blindness it’s why people run over motorcyclists all the time.
Because you’re not your your eyes taken so much information that they have to filter out things that you’re not paying attention to.
is another sister system called the ridiculous activation system or activating system and that really is what conditions, you to pay attention to certain things in your environment.
So how all of this ties together and decision making is that if you go in like thinking and you’re focused on one tree.
You could walk past a forest of opportunity because.
you’re going to suffer from inattentive blindness, because your ra s system is not going to be conditioned to see the other trees over here it’s only going to be trying to grab what you think is the right answer and that’s the danger in going into anything with just one exit plan.
Scott Hawksworth: I love it I love it and I think that is a perfect place to end our discussion today Scott, I want to thank you so much for joining me.
Sharing your story and the great things that you guys are all doing when it comes to self storage.
I think clear hopefully we’ve made the case that it is a very, very much complimentary asset to multifamily and something for passive investors.
To strongly consider adding to their portfolios if they don’t already have it, and for folks who are interested in learning more when I connect find out what what you guys are all doing where can they do that, where, should they go.
Scott Lewis: Our website Spartan dash investors.com and all of our we just launched a fund in April so there’s there’s still a lot of spots left in that for new storage deals that are coming up.
And I also in really encourage investors to dig into that website look at our culture, look at our values download our strategic plan.
That we’re almost done with we’re going to be building a new strategic plan, this year, but you can kind of see where in 2019 we thought we were going to go and we’ve achieved every single thing in that strategic plan.
So that’s where I really encourage investors to go to Spartan dash investors calm.
Scott Hawksworth: Absolutely, and will of course have links to that in our show notes on multifamily investor.com and I will say I pored through those materials in advance of this interview and.
Scott is not telling fibs these this is really great materials and fascinating to read through and see just how you guys are.
crafting the strategy and then executing and the success there and the organization that’s a key to to running a successful business there so good stuff Scott Thank you again so much.
Scott Lewis: Thank you Scott.