Navigating Development in 2024

I’ve spoken to several real estate investors who have zero allocation for development in 2024. Like most real estate decisions, the devil lies in the details, and there are still cases where development is exciting for us. Let’s take self-storage as an example.

We are only looking at markets where existing properties are trading at a significant premium to replacement cost (aka the cost to build). This is not every market in the country and it’s important to understand the dynamics of the local market.

We look for markets that have continued strong operating fundamentals and there are still many of them out there. We want to be confident we can lease up quickly and bring the rents up to market in a reasonable time frame. During lease up, we discount rents significantly, a tactic used by many of the REITs to attract new tenants. Thus, when evaluating new development opportunities we look not only at what other nearby facilities are asking online but also what the existing tenants at that facility are currently paying. That’s because once tenants move in, an institutional landlord like ourselves will significantly increase rent within the first six months. Why? Because most tenants will stay longer than they think. The average tenant in our portfolio stays over 3 years (despite continued rent increases) so it is worth it to discount the rate for the first 3-6 months to attract new tenants. Thus, as long as we feel good about the demand in the market and the rents the existing tenants in the markets are paying, it makes sense to build a new facility.

Returns expectations for value add investors (ourselves included) are high right now. For development, we want high teens to low 20’s returns which we believe look attractive on a risk-adjusted basis. We need to be at least doubling our money in a five-year period. For my family, we are looking at a lot of core plus multifamily now and self-storage development is a nice counterbalance to that risk profile.

I know being pro-development isn’t a super popular opinion right now. I enjoy debating and learning from others so always feel free to reach out, I love sharing market intel across all asset classes.