← The Kirsh Connection
The Kirsh Connection
Why Self-Storage is “Beautiful” with Brian Shniderson, CEO and Founder of Capital 360
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- [00:02]
Andrew Kirsch
Episode 68 of Real Talk. This is our last episode of 2024. Can't believe that 24 is in the books. Lot to be grateful for. Interesting year. First and foremost, want to thank all of my guests who've been on the show this year. Want to thank all my clients. Definitely a topsy turvy year, couple years. Obviously if you've been listening to the show, we've, we've well documented it. Tale of two halves, right? First half of the year, slow sluggish workout, slow loan modifications, foreclosures, things of that nature. Second half of the year it's been, it's been very active. Capital markets have opened up more transactional volume across all asset classes. Still hard to do deals, but there are deals being done which is good to see. And the overall sentiment around my clients is that they're optimistic about 2025. So whether it's the Trump administration coming in, whether it's interest rates have stabilized, you know, there is, there is optimism that, that we are going to have an active transactional year. This week on Real Talk, I have my good friend and client Brian Schneiderson on the Show. He's of Capital 360. Brian is a self storage expert and owner operator of all things self storage. He recently closed on the largest single asset self storage deal in the country here in Cerritos and we talk about that and we just talk about the self storage asset class in industry in general. I hope you enjoy my conversation with with Brian and I hope you have a wonderful holiday season with your family. Thank you.
- [02:03]
Podcast Narrator
Welcome to Real Talk real estate discussions with Andrew Kirsch. In each episode, Andrew interviews industry leaders. We'll hear their real time opinions on today's market, their background and unique career highlights and guidance for newcomers into the industry. You can find this show@scalar kirsch.com and on YouTube, LinkedIn, Apple Podcasts, Spotify, Google podcasts and more. Now here's the host of Real Talk, Andrew Kirsch.
- [02:34]
Andrew Kirsch
Hello, welcome to another episode of Real Talk. I'm here with my good friend and client Brian Schneiderson, CEO of Capital360. Brian, how goes it?
- [02:46]
Brian Schneiderson
Andrew, hi. Thanks for having me on. Exciting. I surprised I'm not the first but you know, whatever line of succession here in terms of podcasts, I'm excited to be on.
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Andrew Kirsch
Yeah, probably only like 60 some odd people.
- [03:02]
Brian Schneiderson
That's it. Yeah, I'm in the top 100.
- [03:05]
Andrew Kirsch
Yeah, I've got a list of about a thousand. So you're really in the top 90 percentiles. So you should feel really good that you're on.
- [03:13]
Brian Schneiderson
You know, I'm wondering, I think I could be your first client. If I, if I'm, if I'm correct, I might have been like the, the first Galar Kirsch client. But again, who knows?
- [03:24]
Andrew Kirsch
I'll have to, I'll have to check our engagement letters, but we've done a lot together, highs, lows in between. And I wanted to have you on just to talk about, you know, self storage. And the more I talk to capital providers, they want to get into specialty asset classes, whether it's senior housing, student housing, small bay, industrial, grocery, anchored retail, and self storage data centers is another one. But self storage comes up a lot. Obviously, you've been in the business a long time and I want to get and talk about your background, but just, let's talk about just sort of today and how you're feeling about the self storage market. And is my perception correct that there's more demand into self storage than ever before?
- [04:25]
Brian Schneiderson
You know, it's such a unique asset class and it's such a favored asset class, and it's been that way really since COVID really elevated it. But I think that alternative assets in general right now are where your institutional capital providers seem to be focused. And I think that's because, you know, they've had some challenges, big challenges with the major asset groups. Right. Your office, often with the retail and multifamily, has been, you know, challenged of late. So, I mean, these are bellwethers, right? I mean, office and multifamily. So, so then you have to decide, you know, where it, where alternative assets might have made up, you know, 4, 5% of your overall allocation, you know, do you turn it into more now because of what's taking place? So I think you're, I think you're absolutely right. I mean, you're, you're seeing it across multiple, both LPs and GPS. But I would tend to say that's what I'm hearing from our institutional partners.
- [05:37]
Andrew Kirsch
Great. All right, so I'm glad that what you're seeing is similar to what I'm seeing. Let's get into how you got into self storage. What drew you to that asset class and at what time period were you doing self storage deals? When, when was your first self storage deal?
- [06:02]
Brian Schneiderson
I mean, I like to say that I was doing self storage deals when it was a 10 cap business because, I mean, a lot of those alternative, you know, alternative assets were like that. So I was speaking at a. And that's kind of where I think you and I really got to know each other was we were kind of both on the, the circuit of doing a lot of, you know, a lot of conferences and whatnot. And I was at the time I was doing investing in real estate and then I had a kind of a private money lending fund and I was doing a conference, I believe it was in Miami in 2010 and I was on a panel on distressed real estate and met a number of guys on, on the panel and, and got approached by the president of a bank, a small, kind of small bank located in Chicago, said hey, if you're around, come on up and see me, I might have some interesting assets for you, some unique stuff. At that time I was playing around with, I should say invested in multifamily condo conversions, hospitality, a number of different product type, but no self storage. And so when I was in Chicago, this is right kind of 2010, 2011, right after the Great Recession, but it was still being felt. So we were having drinks and the banker had told me that they had this deal outside of Chicago in one of the suburbs and it was a brand new self storage facility, you know, beautiful. They built it for I think 13 or $14 million and, and you know, the guy had went ahead and defaulted and would I be interested. So the next morning in the snow, drove out about 20 minutes outside of Chicago, checked out this beautiful facility, didn't know anything about self storage and ended up doing the deal. And it was a really interesting deal because it was, the property itself wasn't really in the right area, was right on a main highway. But the ingress egress was very difficult. So if you got off, you were getting off the highway a couple miles down and this was in a unique place. So it was only like 20% occupied. So the challenge was finding how we could increase the occupancy in a storage facility that wasn't necessarily in the right location. And so I made it my goal, flew out there monthly, dealt with the on site property manager, switched that up until we found somebody that made the most sense and then really just focused on learning the business and did that over kind of an 18 month period at which point we were buying from institutional REITs more storage that they were kind of getting rid of. Totally different time. It was kind of non core to their balance sheet. And we were picking up kind of some C class facilities in Texas and whatnot and, and we ended up selling this asset that we had, kind of got the occupancy up and really substantially increased the noi so we did in my first project in self storage went really well. And from then on forward, you know, really understanding the business, I, I really dove into it.
- [09:35]
Andrew Kirsch
Yeah. Now you, you used a word a couple times to describe this facility. Beautiful. And I don't, I don't think I heard anyone describe a self storage facility being beautiful. Other than you, not just on this call, but there are other projects where you have described self storage facilities as being beautiful. What is beautiful about a self storage facility?
- [10:01]
Brian Schneiderson
You know, this is a great question. First of all, if you're in any business, you better love what you do. If not, get out of it and go do something else because life's too short. And I think you agree with me there. So, you know, all of these projects, Andrew, they're like my children. You know, when you start on a self storage deal, and especially if you're developing it, you've got to find that asset. You've got to do a lot of due diligence on it. Then you've got to kind of circle around, make sure it's going to work in that location, entitle it capital provider, build it, lease it up. I mean, this is years, right? So it better be beautiful to you. And if, you know, there's got to be components to it that you really like. Now, one of the projects that we built in downtown LA, it took second in design. I forgot which year, like 2018 or 2019 or something. And you know, for just design. And it was funny because there was a multifamily being built across the street from it. And the guys were saying, your facility, the facade looks better than our multifamily, you know, and maybe we went a little overboard on that one. But it was, it's really nice, you know, color metals. And we had some, some interesting design concrete. And we just did it. We just did it really. It looked really nice. But yeah, the facility in Chicago, as, as self storage facilities go, most people that aren't in the storage business think of self storage like the kind of antiquated public storage facilities used to be, you know, where they take up a lot of space. And it was the CMU with kind of the 1970s painter along it. It's changed a lot, including public storage. The stuff they're building now is really nice and. But I think that's where the mentality often goes. And I'm seeing storage being built all over the country. I saw one being built on top of a brewery, another one that was, believe it or not, mixed in with multifamily. In, in, in Miami. So you know this facility that I went and saw in outside of Chicago, they just did a great job on designing it and it was a good looking building and it didn't look like, you know, junkie warehouse. It took up a lot of space. So beautiful. You know, maybe I'm reaching but I.
- [12:25]
Andrew Kirsch
Beauty is in the eyes of the beholder for sure man. So walk us through what are the ideal, what is the ideal location? What are the factors that you look for when you are trying to find an ideal location for a self storage development for a facility? Both in terms of, of physical location, demographics, density, income, you know, all the factors that you're looking for and say, you know what, this would be a great location for a self storage facility.
- [13:03]
Brian Schneiderson
You know it's interesting, it paradigm has shifted Andrew and we are a big, big user of AI and so that's changed. If you had asked me the same question a year ago, I would have just said the same thing that had been going on for the last 20 years, right, which is you kind of look for disposable income, you're looking for the demographics, you're looking for, you know, the competition within a certain ring, let's say within 3 mile radius or 10 minute drive and there's all these little kind of boxes that we check. We've now partnered with a couple different groups that are not necessarily software but are involved in assisting us as AI agents in really locating the type of deals that we're looking for. So I'm fully complete believer in AI. Matter of fact I don't really send out emails even if I'm sending somebody to you document gets uploaded AI look at the questions and then I'll, I'll say Andrew, can you look at this and this and, and talk with you about it as well. But that's really permeated the way that we're sourcing product.
- [14:15]
Andrew Kirsch
What is it about that AI is able to do that has changed the criteria of development locations?
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Brian Schneiderson
Efficiency, just efficiency. You know, the agent will just, will know all of our, what we're looking, exactly what we're looking for. So it's from a zoning perspective, from population, from competitors, etc. So all that time, and it is a lot of time especially you know, our main focus is here in Southern California, also in Hawaii, but really predominantly here in SoCal. And the zoning is just a mess. You have.
- [14:58]
Andrew Kirsch
Yeah, sorry, let's, let's, let's talk about that. You know, you and I were intimately involved in a potential self Storage project or an industrial project that we were thinking of converting the self storage in a, in a, in a community here in Southern California. There's a lot of talk about cities not wanting or curbing the amount of self storage. Can you talk about why, why cities are, are, are, are not inclined to approve self storage development as much as maybe they used to in the past?
- [15:41]
Brian Schneiderson
I mean, so the project will name names because it's public record. But the project you and I are talking, talking about was in Thousand Oaks Westlake in 2022. And unfortunately we caused a moratorium. For whatever reason, they thought that our facility was going to be too big. And so there was an issue and they've now made it to where it's virtually impossible because the cost of build doesn't matter where you are in la. It has to hit a certain threshold or it's not going to work. And they're limiting you on that. But the majority, I would say at least half of, of the municipalities here in LA are zoned out of storage, meaning that, you know, they're going to have an overriding decision on what's going to work and what's not going to work. And so, you know, I think you have to become more creative really. And I think that's kind of what it comes down to. But doing the due diligence on if a site will work for us, you know, that due diligence has kind of comes in three areas. The first is meeting, you know, with the neighborhood council. The second would be with the council district, making sure that that's good. And then the third is with like a zoning administrator planning. So you got to kind of have, you know, make sure that those three boxes are checked because it depends on, you know, how long you want to fight for, right? So if, if it's not by right or if you don't have buy in with those, with, with those groups, then you could be, you know, you could be challenged in terms of your development. But this really goes for anything. And it's not just for self storage. Self storage in my view, seems to be the hardest hit in terms of the kind of product that for whatever reason evokes a real negative. Oh gosh, no, we don't want that in our neighborhood. You say small nuclear reactor, self storage.
- [17:35]
Andrew Kirsch
Nuclear reactor, you know, so as it becomes more difficult to build brand new self storage. Have you seen cap rates compress for existing nicer core self storage product? Because it sounds like you're not going to be able to build as as much self storage in certain locations.
- [17:59]
Brian Schneiderson
Yeah, I mean, you know, it. I don't know that I'm the right, the best person to answer that. That's probably more of an advisory with what one of the big CBRE or Newmark or one of those guys. I mean, we just went out on our very, very large self storage facility here in SoCal and I got a good idea of the amount of interest even today. So I can go off of that and say that I wasn't necessarily surprised at the interest in core urban infill Los Angeles. Now that, does that correlate to the Inland Empire or Portland, Denver or some of these, you know, Austin? I don't think it, I don't think it does. So I think obviously New York City, Hawaii, Los Angeles and Northern California, I mean these are very, very high barriers to entry, very difficult to build in. So the second you get certificate of occupancy, your, you've, you've created that value. How long it, how long the municipalities are going to allow that to last, I don't know. And obviously if you can't build anymore, your cap rate should compress, right? I mean, yeah, you know, there was, there was interesting. There was a trade in South Pasadena about a year ago. Small storage facility, good storage facility. And you know, that's if there's nothing that can be done to that facility. So if it's kind of older and antiquated and you could be efficient in terms of your property management. But if you wanted to, you know, add on to that, go underground, go. Can't do it. The zoning now, from what I understand on that facility is they don't want storage there at all anymore. So if, you know, if you were planning on kind of repositioning, that's not going to happen. So it's those kind of issues that are, you know, that are. Make it more difficult.
- [19:58]
Andrew Kirsch
So let's talk about how the self storage business works for those that are new to self storage in terms of how the ownership is sometimes bifurcated from those that are the manager. So you have your public storages, your extra space. What percentage of facilities that are branded and operated by those large public REITs are actually owned by those public REITs?
- [20:31]
Brian Schneiderson
So great question. So, you know, we've always been known as kind of a mom and pop industry. And you know, I'm going to try to go back and remember what the statistics I read, but don't quote me on this, but I think there's about 55,000 storage facilities or somewhere in there in the U.S. and from what I understand, about 30% or maybe a third of that is institutional. And I don't know, you throw the REITs in there so, you know, a majority just aren't. And when I go to like, you know, we don't have our own property management group, we use different property managers depending on the site. So we might use a very strong regional or we might use an institutional reit. But for that I think that, you know, in meeting a number of these, of these different owners in any of these conferences or whatever, you know, some they're just, everybody's doing all kinds of different stuff and they have this piece of land and they decide, you know, hey, this looks like a great place to put a storage facility. So they go ahead and build one and then they, you know, have a, a, an institutional kind of player help them in terms of laying it out and the unit mix and obviously within the lease up. So it's, it's a different business than. Yeah, let's say what I'm doing.
- [22:02]
Andrew Kirsch
Let'S talk, let's dive into operationally. You know, if you, if you, if you look at multi family for instance, and you contrast traditional multifamily versus student housing, the, the lease up process is completely different. For student housing you have one shot. If you're not leased up by, you know, probably by April or May, you're done for, for, for the year and with your students moving in and you know, in August and, and then moving out in the summertime. Talk about self storage. Lease up. How long it takes to lease up a facility. And once you have a tenant, what is the turnover?
- [22:50]
Brian Schneiderson
Yes, some of those statistics. I would have to reach out to my staff and get the most up to date. But I mean I can, what we have going on right now. So we have a property that we just finished, finished building in the San Fernando Valley here in Los Angeles. And it's about, so it's 200,000 gross, about 150,000 net rentable. And you figure average storage facility in the US is I think it's around 75,000 net rentable or maybe less. But ours is twice that size here in la, but urban infill and we just finished it, we got certificate of occupancy in March. So we're what, seven months and we're 85% occupied. We have a, we had a pro forma of like I think 24 months or 30 months. So we're going to just beat that up and, and you know, really excited about that that we were able to lease it up so quick. And you know there was also another facility that was new that was down the street that opened six months before us. So you really can't tell. It's, it's. And we go to, we use our, our kind of property management partners to help us because they have all the data analytics and localized to, to, to assist you with this. But you know, it sometimes it, it you just can't tell.
- [24:21]
Andrew Kirsch
Yeah.
- [24:22]
Brian Schneiderson
That answer your question? Yeah.
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Andrew Kirsch
But what about turnover? Because my sense is once you're in it's like you never leave.
- [24:29]
Brian Schneiderson
So the big buzzword around the industry right now is ecri which is existing customer rental increases. So that's kind of been happening. You're reading or in the, in the News and kind of 23 and 24 it seems like you know, you're reading that street rates are decreasing in self storage. And I think that that's really micro, you know, maybe very general for other areas but you know, dense urban infill areas. And if you're in you know, West LA or Santa Monica and you have a legacy asset that never. That can't get replaced. You know did the, are the rates going down there versus you know, the Inland Empire where there you can build all around. So I'm not sure around about that. I from what I understand from our properties and you know our average tenancy used to be around six months and now it's pushing closer to a year with these ecri. I think that's you know where you get where people come in on a teaser rate and then they get start getting bumped at three, maybe month three and maybe month nine. So they may be getting two hits within a year if they're staying at that facility. Yeah and that's, that's just, that's kind of industry ride wide right now.
- [25:47]
Andrew Kirsch
So I want to, I want to touch base and get into what the next two to five years what you're planning for. But before we do that, I know you touched upon this recent sale in, in la, in Cerritos. But I mean it was a monumental sale. I think you said that it could be or is definitively the largest single asset self storage sale in the, in the history of the United States in history. So talk about it to the extent you can bought it. If you could talk about cap rates and get into more of the specifics as to what made this transaction such a bellwether transaction.
- [26:32]
Brian Schneiderson
Yeah, so, so yeah we again that's like, like a child. So that was our extra managed by extra space. It was a Cerritos 3 facility and it was almost 300,000 net rentable, making it one of the largest facilities, you know, in the country. Definitely one of the largest here west of Mississippi and you know, one of the largest here in, in SoCal. So when we found that property, it's right off the, one of the large thoroughfares, the 605 Freeway. And we were kind of planning this, you know, I, we're. I was joking because we were trying to sell the dream that it wasn't too big. And if you dropped a pin in a map of LA and Orange county, it's right in the center and urban infill and, and you know, it's always nice to be right eight years after the fact. Right. But we sold into, into what I don't need to tell you, Andrew is very down market. Right. And, and you know, we had Odyssey funds, we had sovereign wealth funds, all the big equity players. Everybody was bidding on this. And I was, you know, I wasn't so surprised. I just didn't know how it was going to go with the, with the economy and kind of, you know, capital so hesitant and on the sidelines. It's all over the paper. So it was sold at $91 million.
- [28:03]
Andrew Kirsch
And what is that on a cap rate?
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Brian Schneiderson
I'm not sure what the, how the cap rates, how it, how it ended up, because the part of the sale was with an expansion of like 38, 000ft. So I, I'm not sure how that translated.
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Andrew Kirsch
Got it. All right, so as we're heading, you know, at the end of 24, almost in 25, what is, what is your plan over the next couple years?
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Brian Schneiderson
Yeah, well, right now we have a, a beautiful development that we're working on in, in Hawaii and.
- [28:42]
Andrew Kirsch
Well, you can say beautiful in Hawaii that I, I get. Okay.
- [28:47]
Brian Schneiderson
Yeah, man, it's, it's nice. And so really excited about that. We've got another one right outside of Waikiki that we're about to get started on and then, and then a couple more here in la. So, you know, I think it's, it's an interesting time and it's, it's interesting because your capital providers are tiptoeing into, you know, putting up money for deals and debt providers are, you know, looking and relooking and thank goodness we have, we're kind of best in class is what we do. We got a great track record and, and I think we're very particular about the kind of sites that we look for. And it's, you know, it's it's, it's in areas that are, wow, if you can do it there, you know, it's, it's, it's kind of a winner. So I think that on the two to five years, hopefully those projects will have been built and be in lease up. And I think that's just kind of our model where we're not one that's going to be the biggest builder or a mass builder. We're not looking at rolling up facilities in the Southwest with Mom and Pops or anything like that. We're very particular, we do an incredible job in our developments. We're very particular about what we build. We do build very large and we try to get into very high barrier to entry markets. So we kind of put a lot of impediments in front of us. But when we do have a project, it's, you know, it's, it's almost ends up being like four projects between LA and New York. Yeah.
- [30:33]
Andrew Kirsch
And you, you've had different type of capital partners, institutional syndication, high net worths. Do you have a preference as to how you capitalize deals?
- [30:52]
Brian Schneiderson
That's a really good question. And I think, you know, it's almost, it's almost like, you know, dating and having a girlfriend, you know, at different times of your life. I think, you know, different people might make the most sense. Right. You know, and I think it just depends on the type of project, what the environment is and what you feel, you know, where you're at in your, in your career or where you're at in your cycle that you know who, how, how and who you want to partner with. But you know, obviously, and you've seen it, Andrew and I could throw it back at you and say, what do you think? But look, the right partner, you know, it's not necessarily about making the most amount of money with, with your partner in the splits. It's about culture and it's about cultural congruity and your ability to, during COVID Trump, the Trump tariffs or any of the major items that we've dealt with which we had no control over. You have to be able to talk with your partner and they have to be there for you. And if they're not, you got a big problem and you, and you're, you know, and we've had not gone wood, which I think this is wood. But I, you know, we've had really good success over the past kind of 10 years with our institutional partners as well as our debt providers where when there's been an issue that has come up and in la. I think you remember we had one of our projects, we're right in the center of it after we had all of our B permits and we're, we're already, you know, we're in the ground, we're building. You know, there was an overlay in la and the city came to us as well. You know, we're going to want you put a stoplight here and we're going to want you to half a mile both ways, you know, put sidewalk. It was like to the tune of a couple million dollars. And we had to fight that. But, you know, that was, that was nothing that we could have prepared for. But again, our, you know, capital partner and our debt partner were like, let's figure this out.
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Andrew Kirsch
So.
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Yeah, well, what I tell people is what makes a good partnership is after you've spent, you know, a few weeks, maybe longer, negotiating, I don't know, a, a 60 JV agreement for sure. What for those that are only listening on audio aren't going to see this. What you want to do is you stick this in a drawer and never see it again. And if you have to open up that drawer and start looking at major decisions and this and that and who has rights and defaults and remedies, then, you know, the partnership didn't go well. And so my hope to all my clients who negotiate those long, intensive, laborious joint venture agreements is you'll never see it. It's just there, it's in a drawer. And Brian, I just. First, I want to thank you for coming on to the show. You're a good friend and partner and client and nobody knows Self storage better than you do. And I don't know about that, but how about your. Well, you were what, the top, top 60, 65 people of real talk. You're one of the top 60 to 65 operators or owners, developers of Self Storage.
- [34:16]
Brian Schneiderson
Well, Andrew, I want to thank you and you know, honestly, and you've, you've saved me from so many what I like to call holes covered with leaves that we didn't fall into because of your experience and, and really your staff and everything. So, you know, back at you.
- [34:34]
Andrew Kirsch
No, I really appreciate it. Continued success in those, on those beautiful. You sound like Trump at the beautiful wall, the beautiful self facility. And I will check out the one in Hawaii. That for sure, man, definitely deserves its beauty. Brian, thank you. I appreciate you coming on. Thanks.
- [34:53]
Brian Schneiderson
Okay, thanks, Andrew.
- [34:55]
Podcast Narrator
You've been listening to Real Talk, real estate discussions with Andrew Kirsch. You can catch prior episodes @skalar kirsch.com and on YouTube, LinkedIn, Apple Podcasts, Spotify, Google Podcasts and more. Thank you for your positive reviews, comments and for sharing the show with others.