Comment by pdeuchler | Hacker News Reader

Comment by pdeuchler | Hacker News Reader

This article misses the entire point of the self storage game, in that it's all about real estate. I'm not sure of the structure they have over in the UK but I'm quite sure it's the same type of thing, considering that land over there is much more valuable.

Here in the US you'll find a vast majority of the land used for self-storage is owned by either investment firms specializing in commercial/self-storage real estate, MLP's (Master Limited Partnerships), or REIT's (Real Estate Investment Trusts). There are a lot of nuances to it, but essentially these are tax vehicles that buy up a bunch of not particularly sexy land, but in an industrious location that has long term potential. The issue then becomes what to do with the land while you sit on it, and the answer to that is self-storage. Self-storage warehouses are incredibly cheap to build and operate, often times the largest cost is insurance (although that's not saying much nowadays). Many MLP's/REIT's either own their own self-storage company, own a controlling share in one, or at least own a good percentage of one, or the self-storage company in and of itself is an investment firm wrapped in a thin veneer of self-storage. Thus, on top of the rent you can get a nice cut of the storage profits. It's a fantastic racket if you can get momentum, after a certain point the money essentially prints itself and you still have control of a massive chunk of land to boot. The self-storage business is also very predictable, and highly tuned, so the investment returns on both the land and the storage business are very conducive to long term wealth building.

I'd be curious where you are getting that narrative from. It differs from what I am familiar with for sure in terms of knowledge of this industry. Not that that's not the play of some REIT's (or what they say they are doing but not really doing) of course but I wonder how many of the locations fall into that category vs. just "after a certain point the money essentially prints itself". Which sounds pretty good. [1]

(What you are saying is typically done though with parking lots in cities for sure for various reasons.)

"and you still have control of a massive chunk of land to boot"

Unless you have land in a particularly valuable location the fact that there is a building on it is going to contradict having someone purchase it for development purposes. It's being used. In other words "nothing to see here move along". And if it was in a super valuable upcoming area that would already be priced into the land cost and might be prohibitive.

I'd also would like to know what the time frame is for something like this to actually happen and how many times it has actually been done. That is, out of the entire self storage industry, how many locations (multi level for example - those larger buildings) have been raised for a higher use (with every tenant thrown out)? And something else built on the land which generates more revenue. Where a comparable piece of empty land was not available?

Of course it might be something that the REIT says marketing wise in order to enhance the appearance of the value of their properties. But to me it seems that the reality of whether that would actually happen (and how often) might be entirely different.

That said any links to this would be nice if you can pass along.

[1] For self storage that I am also familiar with they predictably raise the price every year. And it's not easy to move things out (you need a truck or you need to dispose of something.)

I've seen one self storage facility in my town removed in favor of a commercial medical plaza recently.

Self storage buildings around here are just cheaply built steel buildings. They are easy to dismantle.

There are those for sure. Separately I know of a 155 unit residential condo complex in Florida that is being torn down to build a high rise (resulting in 4x value to unit owners the market is so hot right now).

But then there are these examples which seem highly unlikely as the investment play involved. Browse the links on this (a typical larger storage company site) and you will see nobody is putting up a building multi story (with elevators) and hundreds of tenants with the intent of holding it to tear down. Not that like anything it couldn't be torn down if the right opportunity came along.

http://www.publicstorage.com/

http://ir.extraspace.com/phoenix.zhtml?c=180054&p=irol-irhom...

But hard to believe that is actually the business model they are relying on although it could of course be a future upside.

It's relatively common practice - buy RE as a speculative investment and hold hoping that it will grow in value as an area develops.

In the meantime, it would be great to have the property throw off some free cash flow, so developers build businesses on the property that involve highly generic structures that are easy to build (low investment) and easy to demolish - otherwise, the cost of demolition for any prospective buyer will reduce the value they are willing to pay for the land.

Common businesses for this purpose are parking lots/garages and storage. When you see those, it's pretty safe to assume the owner is trying to maintain as much option value as possible in the property.

Once you build a specialized structure, you lose option value on the property.

>Unless you have land in a particularly valuable location the fact that there is a building on it is going to contradict having someone purchase it for development purposes. It's being used. In other words "nothing to see here move along".

Huh? It's not like the way those things are sold is people driving around and searching for empty lots.

The owner actively seeks to sell it, and he (or his agent) negotiates with prospective buyers who might not even have visited the location at this point, just look for something in that area.

The fact that there's a building (the garage or self storage) on the location so "it's being used", doesn't matter at all as to whether there will be buyers for it.

Heck, buyers investing in upcoming (development/price wise) places are known to buy and demolish existing residential buildings and established business to build their new stuff (an office building, a mall, a skyrise, etc) -- a parking lot is nothing compared to that.

And it even comes with a single owner to negotiate with, as opposed to buying several different residential buildings to build on.

People do the same with parking lots in Brazil.

Buy some land in the city, and old crumbling house (which usually are big), and sit on it waiting for the value to go up, or some construction company wanting do build an apartment building on it.

What to do with the land while you wait? Make it a parking lot and car wash. Lots of buildings here only have 1 parking spot per apartment, and the tendency nowadays if for middle class families to have 2 cars.

Workforce for a parking lot + carwash is abundant and extremely cheap, they don't even need to have a driving license, and barely be able to read.

Quite a lucrative business.

I recall reading that this was a big problem with downtown Denver back in the 60s or 70s. The whole downtown area was covered in parking lots because people were sitting on land waiting for it to go up in value. It was having a negative impact on trying to turn downtown into an attractive hub for more business to come in.

edit - found it http://usa.streetsblog.org/2013/05/13/how-denver-repaired-it...

Downtown Minneapolis had/has the same thing.

The interesting part is that most of the parking lots are owned by groups of moderately wealthy folks (doctors, mid-level corporate execs) who had bought super cheap in the 70's. The income they are able to make risk-free is a huge obstacle to redevelopment.

As an example, there's lot next to my old office that gets about 250 cars into a half-block lot. At six dollars/car/weekday plus extra money on weekends that's about $400k/year before taxes split among a dozen investors. (An incredible yearly return when you consider they probably paid less than $250k to buy a run-down building and level it back in the 70's.)

If somebody wants to buy that lot to build apartments, they're going to have two hurdles.

First, all of these guys are probably retired, so they're looking for risk-free income rather than capital. With interest rates below 3%, they're going to ask for $12 - 15 million so they can invest it in bonds and still get the same income. That's a ton of money just to buy land.

Second, most of these partnership agreements are drafted such that every partner has to agree to sell rather than a majority. If one guy holds out for $20 million, it could scuttle the deal.

Slowly but surely the parking lots are being replaced, but it's happening much more slowly than it should.

Eminent domain is always an option, along with the value as determined by the local taxing authority.

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