November 02, 2020 | by Ken Nitzberg, Chairman & CEO
It is that time of year again when we wait to see who will win the World Series and which college football team will finally beat Alabama – but not this year. We are still in the midst of the Coronavirus pandemic as well as what everyone – no matter of which political persuasion – say will likely be the most important election in a hundred years. There will be no trick-or-treating this year.
So how is all of this impacting the self storage business one might ask? It has been a long-held belief that self storage is recession proof, which I personally do not believe, but I do believe it is somewhat recession resistant. Since the inception of the pandemic on a widely invoked basis in mid-March, at Devon we have seen our overall portfolio occupancy, gross revenue and net income from our portfolio of now 45 self storage facilities grow. How is that possible in a pandemic one might ask?
What we are experiencing are fundamental changes in the traditionally staid self storage industry. At Devon we have moved from approximately 50% of our new leases being generated on-line – touchless as the current saying goes – increase to over 90% at some stores. It is both fortuitous and rewarding that the company has spent so much time and capital making certain we have a very robust and interactive web site as those self storage operators that don’t have such a tool at their disposal are being rapidly left behind.
Our revenue management and value pricing systems are more critical than ever as they allow us to stay competitive while also staying inside the various rental rate guidelines promulgated by city councils, mayors and governors. Our systems allow us to rely on verifiable statistics instead of simply following our gut instincts.
One of Devon’s key market drivers is our self storage conversion program. Simply put, this is where we look to acquire well located but vacant properties, usually big-box retail stores, but not limited to such assets. We acquire them for very little – usually for the value of the land on which they sit with no consideration for the actual building. We then convert those assets into state-of-the-art self storage facilities, lease them and, depending on the investment objectives of our capital partner, either sell them or finance them to the point where our capital partner has very little if any capital still in the asset. We have successfully done this for over 27 years in 24 states and three European countries and we are aggressively back with that business model once again.
In August Devon opened a conversion of a vacant Kmart in Grand Rapids, MI as a 60,350 square foot self storage facility. This was two months ahead of the pro forma. The site has literally taken off with its leasing program such that the original pro forma called for an opening on October 1 with 15 net units leased in October. As of October 21, the site had already leased 97 units. Needless to say, both our capital partner and Devon are very pleased with the project.
Our second conversion project, the conversion of a former furniture store in Orlando, FL, is also well underway with a targeted opening of mid-December 2020. It will offer 1,250 self storage units in 97,055 net rentable square feet.
In August Devon entered into an agreement with Inland Private Capital to invest $100,000,000 in conversion self storage projects specifically in Opportunity Zones. Congress passed the law in 2019 that created opportunity zones which are areas in the country that are designed as needing redevelopment. The act provides generous tax benefits for investors that acquire assets, be they buildings or vacant land, and then improve them by investing at a minimum 100% more than the acquisition cost (i.e. if a purchase is for $2,500,000 then to qualify the investor would have to improve the asset with capital totaling $2,500,001 or greater). Assuming the investor then holds the asset for 10 years the tax benefits are substantial. It can be a win/win for the community and for the investor.
As of this publication Devon has acquired the first property in the new joint venture, a vacant former furniture manufacturing building in Grand Rapids, Michigan and we have six additional properties under contract to purchase just awaiting final due diligence and in several cases a zoning approval. When fully funded the joint venture should have a minimum of ten assets with at least an initial market value of $100,000,000.
These past eight months have certainly been challenging to the overall economy and to our company. I am very proud of the way our people throughout the company have risen to the task, keeping our facilities operating successfully, and allowing the company to prosper. We all look forward to 2021 and the opportunities we anticipate it will bring.