There are two main strategies for self-storage investing: Value Add and Ground-Up Development. Each has distinct characteristics, offering unique advantages, challenges, and considerations. Here’s a look at the three major differences between Value Add Investing and Ground-Up Development in self-storage.
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1. Project Timeline and Speed of Returns
Value Add Investing:
The primary advantages of value add investing are the relatively quick timeline and quicker cash flow. In this approach, investors purchase existing facilities that may be underperforming, either due to poor management, deferred maintenance, or lack of modern amenities. With targeted upgrades and operational improvements, investors can increase revenue and occupancy rates, often achieving a turnaround within a few months to a couple of years. This accelerated timeline provides quicker cash flow and returns, which can be appealing to those looking for a faster ROI.
Ground-Up Development:
On the other hand, ground-up development is a long-term investment. Developing a facility from scratch involves finding the right parcel of land, securing permits, constructing the building, and then leasing up the units. Depending on the market and regulatory environment, this process can take anywhere from 2-4 years—or even longer—before the facility begins generating significant income. The reward for this patience is often a higher potential return. The timeline and cash flow makes it more appropriate for investors seeking high returns on a longer term investment.
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2. Risk and Complexity
Value Add Investing:
Value add investing generally carries lower risk compared to ground-up development because the asset is already built and often generating some income. The facility has an existing customer base, and the upgrades—such as adding security features, optimizing management, or rebranding—are usually more straightforward than building from the ground up. However, while the risks are lower, the returns may also be capped compared to ground-up development, especially in markets with high competition. In the current market investors are also challenged to find cash flowing assets. The influx of large Equity Groups and Wall Street investors has pushed sales prices sky high. This has been great for sellers, but makes it harder to find future deals that make sense.
Ground-Up Development:
Ground-up development is inherently more complex and carries a higher level of risk. From site selection to zoning and permitting, there are many factors that can affect the project’s timeline and cost. Delays or unexpected expenses during construction are common, and there’s always the risk that demand may shift by the time the facility is ready. Despite the higher risk, the rewards can also be substantial: with a well-located facility and successful lease-up, ground-up developments have the potential to achieve returns that far surpass those of typical value-add projects. Due to the risk and timeline, there are less large Equity Groups and Wall Street money in the mix.
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3. Market Demand and Competitive Advantage
Value Add Investing:
In value add projects, investors usually target established markets where they can improve an existing facility’s performance. By focusing on better management or making cost-effective upgrades, investors can enhance revenue without needing to capture a large share of the market. Since the asset is already positioned in the market, investors can focus on capturing additional demand from nearby customers or under-served niches, like climate-controlled units. However, competition can be fierce, as new facilities continue to enter the market.
Ground-Up Development:
With ground-up development, investors have the advantage of creating a facility tailored to current market demands. This might mean incorporating modern amenities, flexible unit sizes, or climate control to appeal to the target demographic. Additionally, ground-up development allows investors to choose the optimal location, potentially reducing nearby competition and drawing customers from underserved areas. However, market demand can be hard to predict over the long term, making thorough market analysis essential for success.
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Conclusion
Value Add and Ground-Up Development strategies each come with different risks, timelines, and demands on resources. Value add investing allows for quicker cash flow, lower risk, and improvements to existing assets. Ground-up development requires more patience and a higher tolerance for risk, however, it offers the potential for greater returns by meeting market demand head-on with a new facility.
Safe Storage USA understands the inherent strengths and weaknesses of both strategies and actively pursues opportunity in both.