Drew Hoeven

By Erica Shatzer

ast January, the prime interest rate was 7.5 percent—more than double the abnormally low rate of 3.25 percent that Americans had enjoyed throughout 2021 and 2022. By mid-2023, the prime rate had increased to 8.5 percent, where it remains today.

Although the Federal Reserve has indicated that it will start cutting interest rates around mid-year 2024, the cuts (at least three of them are lined up) will be slow and gradual. So, what does this mean for investors, developers, and operators who are still eager to grow their self-storage portfolios?

To provide insight into the investment arena, Modern Storage Media spoke with Drew Hoeven, chairman and chief investment officer (CIO) of Newport Beach, Calif.-based Westport Properties, Inc., a multi-vertical real estate investment and management company with many high-profile and respected institutional and private investors that has been in the self-storage industry for more than 35 years.

Like many other seasoned professionals within the industry, Hoeven, who has over 19 years of real estate experience in self-storage acquisitions, development, construction, and operations, remains “cautiously optimistic” about 2024, especially after 2023, which was a more challenging year for most due to inflation, higher interest rates, and the increased cost of capital.

“With interest rates likely topping out, and projected cuts this year, we see values stabilizing and opportunities to follow,” he says. “We are patiently waiting and ready to transact when the market will allow.”

While Hoeven believes that the first half of this year will resemble a continuation of 2023, Hoeven foresees “things easing up” after the second quarter. “I think there will be more transactions in the second half,” he says, adding that the market has “reset” following the record-breaking days of the COVID-19 pandemic. “Sellers and buyers will come to a meeting of the minds once interest rate unknowns settle.”

His predictions align with the interest rate projections made by some financial institutions within the United States. For instance, Comerica Incorporated, a financial services company headquartered in Dallas, Texas, expects an initial rate cut of 25 basis points to occur in June, followed by “a cumulative 0.75 percentage point in rate cuts over the course of 2024.”

And despite uncertainties surrounding the upcoming presidential election, interest rate movements during election years have not been measurably different from non-election years. (According to historic data, rates have increased 10 times and decreased seven times during election years since 1955.) “I do not think the presidential election will alter the transactional market for self-storage,” says Hoeven. “However, I’m hopeful housing transactions will tick up due to interest rates declining and therefore improving our operational metrics.”

On another note, even though fewer economists believe that a recession is imminent than last year this time, with 76 percent saying the chances of a recession in the next 12 months is 50 percent or less, according to a December survey from the National Association for Business Economics, it’s worth pointing out that there’s one more irregularity in 2024 that could be cause for concern: February has 29 days this year. A handful of unfavorable (though perhaps purely coincidental) leap years during the 21^st century come to mind: The dot-com bubble burst in 2000, The Great Recession in 2008, another economic recession in 2016, and the pandemic-related recession in 2020.

Although amused by the proposed link between leap year and economic slumps, Hoeven isn’t overly concerned. “I’m not sensing a recession is coming,” he says. “Our CFO, Scott Nguyen, reminds me that recessions only happen if the Philadelphia Phillies win the World Series. Thankfully they lost in ‘22 and just missed making it to the series last year.”

For Westport Properties, the current economic outlook means the company will continue to practice patience in the coming months. “That’s our strategy,” says Hoeven. “Good buyers should have patience, but patience can wear thin.”

As they patiently wait for the tide to turn, they continue to comb through the market for acquisition opportunities with value. “We’re constantly looking at deals and making offers,” he says. “We look at everything, but mostly in MSAs where we have a presence.” Properties owned and managed by Westport Properties are operated under its US Storage Centers brand and located in 19 states.

Hoeven notes that while Westport Properties looked at a large number of sites and portfolios, they only closed on one deal in 2023, losing some potential acquisitions to more aggressive bidders, but they did add 38 management contracts to its portfolio.

Indeed, the company’s strategy of patience paid off last year, and Westport Properties was able to expand its portfolio regardless of the harsh economic climate. Per data presented in Messenger’s annual Top Operator’s list, Westport also climbed up four places in 2023, from No. 18 in 2022 to No. 14. In total, Westport owns and/or manages 224 self-storage facilities and approximately 15.5 million net rentable square feet of storage space.

When it comes to new development, Hoeven has a “contrarian outlook” because it’s a “lengthy process,” with a “five- to seven-year horizon to stabilization.” This is especially true in California, where there are stringent development regulations and strict building codes. “The last development we completed was in late ’21. We couldn’t get comfortable with land pricing the last several years,” he says. “We’re currently processing entitlements on one site and have several we are actively underwriting or negotiating on.” Nevertheless, the company does keep an eye out for viable land.

“You need expertise to get through the hair and patient capital,” Hoeven says, adding that Westport is blessed to have great capital partners. “We also have a great, stable legacy portfolio that gives us the ability to make smarter decisions and not chase fees.”

For those new to self-storage investing, Hoeven has plenty of practical advice. First and foremost, he reminds buyers and developers to “be diligent.” Due diligence is not optional, especially when the costs are considered. Whether purchasing an existing facility or constructing a new one, it needs to be financially feasible. Building or buying a facility for more money than it can produce just to have a self-storage investment is a fast-track to foreclosure.

“Learn from the past,” Hoeven says, citing “poor underwriting” based on the record highs of the pandemic as one of the reasons new self-storage developments are failing to meet their proformas. That poor underwriting includes exaggerated rent outlooks and overly optimistic lease-up times. Therefore, he reminds investors to “be realistic” going forward.

To those wanting to build substantial portfolios at breakneck speed, he says, “Don’t do deals just to get the fees. One good deal is better than 15 bad deals.”

Hoeven has one final suggestion for investors: “Be strategic about the capital stack, but don’t get greedy.” The latter half of that advice could easily apply to sellers, too, as there’s been some chatter throughout the industry about a disconnect between buyers’ and sellers’ expectations stemming from cap rates. Capital and valuations haven’t been matching up either, but he thinks “values will be cemented” this year and the sector will start transacting again. And when things eventually loosen up, Hoeven’s guidance may help you glide out of the starting gate with ease!