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.
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.”
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.”
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.”
In addition to his day-to-day responsibilities as Westport Properties’ chairman and CIO, Hoeven is committed to supporting development in real estate and cancer research. He’s a past chairman of the CSSA board and a member of USC Lusk Center for Real Estate, the NAIOP Young Professionals Group class of 2008, an the NAIOP Forum. (NAIOP is a commercial real estate development association.)
Hoeven is also an active board member of Kure It, the non-profit organization founded by his late father Barry Hoeven to raise money for innovative cancer research. What’s more, giving back is a meaningful part of the core values and corporate culture at Westport Properties.
“We have about 600 employees and probably 95 percent of them could give you the background on Kure It,” he says, which is a testament to their allegiance to the cause.
The company’s Round Up for Research program gives US Storage Centers’ tenants an opportunity to round up their monthly rental payment to the nearest dollar and donate the change to Kure It. Westport has raised well over $4 million for Kure It since the program was implemented in 2010. Proceeds from all the company’s Charity Storage units are donated to Kure It as well.
“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!