To further Leverage.com’s mission of democratizing knowledge about commercial real estate, we started an interview series with all kinds of CREF pros: everyone from multifamily and medical to cannabis and construction. This time we connected with Ben Lapidus, Chief Financial Officer at Spartan Investment Group.
Here’s how the conversation went:
Spartan has had a lot of success with value-add self-storage. Any advice for aspiring investors who want to try out that asset class?
Self-storage is an incredible asset class because it satisfies Spartan’s 3 evaluation criteria when choosing our investment vehicle:
- easy to manage: The operation can run with no personnel.
- easy to maintain: There are limited building systems that can fail and require replacement.
- easy to monetize: Leases are month-to-month to make rents more malleable with the market, and eviction laws are more favorable than housing.
It’s also been the best performer in commercial real estate over the last two recessions, save for the data centers asset class, proven by the 11.2% nation-wide industry rent growth experienced from July, 2020 to June, 2021.
But it’s also a relatively easy asset to build (though it can be difficult to get approvals in many jurisdictions), so most markets are on average oversaturated. Yet self-storage is convenience retail, meaning it’s very intersection specific like a gas station or a convenience store. So choosing the right location with limited competition, great visibility, and appropriate current and future demographics is more important in analyzing an opportunity than its financial potential.
What about advice on RV parks? That’s another investment people tend to overlook.
RV parks as an asset class is where self-storage was 20 years ago. Like generation 1 storage, RV parks have limited collateral.
In self-storage, drive-up storage buildings were made of corrugated metal, difficult to repurpose if self-storage was no longer a needed use for the community. Consequently, the lending environment didn’t love the collateral the asset class offered. Interest rates were higher, and so were cap rates.
As the space matured and institutional players got involved, the lending environment became comforted by the liquidity in the space and began offering more competitive rates even though the assets stayed the same. Interest rates have been driven down to match Class A multi-family, and cap rates have followed, driving values up.
Similarly, RV parks have limited collateral — pads, utility plugs, and a varying spectrum of recreational amenities. But the consumer demand-supply curve for RV parks is following storage. Millennials are now the #1 consumer of RV parks and campgrounds, the asset class is proven to be recession proof, and the industry revenue has annually increased by double digits, just like storage.
In 2020, in the heat of COVID, a single asset RV park sold for $88 million in Arizona, a record for the industry. Just like self-storage, the space has begun to attract institutional players like Equity, Sun and Carlyle, so the lending community will follow. We’ve seen a 2-point cap rate compression in 3 years and the lending environment’s rate and terms are nowhere close to matching the storage industry. Just like storage, we expect market rents to expand and cap rates to compress in RV park assets — the double whammy that most investors seek.
That said, unlike with storage, RV parks are still welcome development opportunities within many jurisdictions where they make sense as they are great tax revenue paid by outsiders and a great employment source for its residents, so the space is susceptible to over construction; but we seem to be very far away from that reality.
You’re one of the only real estate companies we’ve seen that is seriously investing in educational content. What led your team to that decision?
Spartan Investment Group lives by its GRITT Values: Growth, Respect, Integrity, Tenacity and Transparency. Our mission is to improve lives through real estate, most especially with those who also live and work by our values.
By providing content that explains how investing works inside our ecosystem, we are offering an opportunity for our partner investors to exercise the Growth value while simultaneously exercising the Transparency value ourselves. We know that investing is both formulaic and emotional. In the retail space, investors are more inclined to invest in people they trust than deals that are attractive. The right deal with the wrong operator will always be a failure, but the wrong deal with the right operator can be salvaged. Those who intuit that fact are more inclined to trust their gut and their emotion on the individuals and apply their formulas against the deal as a secondary consideration. So it’s important to us to tell folks who we are, why we are, and then act accordingly to earn their trust before their investment.