A Private Equity Real Estate Investor Bets Big on Self Storage
Prime Group Holdings’ latest self-storage fund reached its hard cap of $2.5 billion.
Single-sector private equity real estate funds are not unusual, but the majority tend to target core real estate assets. But Prime Group Holdings LLC has found success off the beaten path, focusing its funds on niche property types. Investors have poured $2.5 billion into its latest initiative, Prime Storage Fund III, focused on the self-storage space, blowing past the fund’s $1.5 billion target to reach its hard cap of $2.5 billion.
The offering is the largest private equity fund ever raised to exclusively to invest in self-storage properties, according to PERE. Prime announced the closing of the fund Jan. 26, 2023. The commingled fund’s investors include sovereign wealth funds, public pension plans, university endowments, banks, insurance companies, family offices and foundations. Over 30 countries are represented in its investor base. The fund’s base includes both new and repeat investors from Prime’s previous funds.
It is the third fund the company has raised focused on self-storage assets, with each growing in scale. Its first fund launched in 2015 raised $154 million in equity and acquired 67 assets. Prime launched its second fund in 2017 and raised $706 million, which it used to acquire 121 assets. To date, its third fund has deployed 18 percent of its capital and acquired 63 storage assets. Overall, Prime Group Holdings has purchased $5 billion in total assets in the self-storage space totaling more than 22 million sq. ft.
“As a recession-resilient, need-based asset, self-storage offers its investors reliable cash flow with very little downside, plus multiple proven methods of creating value post-acquisition,” says Robert Moser, Prime Group’s founder, principal and CEO.
Prime’s history dates back to 1998 focusing on roll-up strategies for niche real estate assets. Its first investments were in the manufactured housing and RV park sectors as well as in the self-storage and multifamily spaces. Prime Group Holdings was founded in 2013 and began launching funds soon after.
The interest in the Prime’s latest fund is inline with a broader trend that’s seen investors that have typically targeted other real estate asset classes cycle into self storage, lured by the sector’s stable fundamentals and attractive cap rates.
“The buyer pool for self-storage assets has expanded since the health crisis began, as investors familiar with other property types have engaged with the sector,” says Steven Weinstock, national director of the self-storage division for Marcus & Millichap, working in the firm’s office in Oakbrook Terrace, Ill.
In times of economic uncertainty, self-storage properties have proven to be especially attractive to investors.
“Much of this cross-sector capital has come from multifamily investors, where yields have become comparatively more compressed,” says Weinstock. Throughout these ups and downs, the cap rates investors accept for self-storage properties continue to be significantly higher than multifamily cap rates. “That bodes well for continued capital inflows.”
Sourcing deals in a competitive market
Prime’s strategy in the sector is to source off-market transactions as much possible. It focuses on undersupplied markets across the U.S. and aims to streamlining operations at the properties it acquires through institutional management via it’s in house full-service property management operations. The goal is to take an asset class that—outside some of the large publicly-traded REITs—is fragmented. The space provides Prime “with the opportunity to implement professional and sophisticated managerial and operational protocols, as well as leverage economies of scale in seeking attractive risk-adjusted investor returns.”
We continue to identify opportunities to aggregate and institutionalize ownership and management across the North American self storage market,” Prime Holdings CIO Douglas Kotelly said in statement. “We have deployed capital from Fund III into assets for which we believe we can execute value-add business plans and best utilize our management capabilities. We look forward to leveraging our team’s real estate investment experience as we pursue superior returns for our investors.”
The off-market pipeline could help it find acquisitions for the fund amid a broader climate in which investment sales volumes have dropped dramatically amid higher interest rates and tightening capital markets.
Prime’s plan for navigating this market is to be conservative with its use of leverage.
“To that end, we evaluate and buy forward-looking interest rate caps on our debt to hedge the risk on our assets, which has us well positioned in the current capital markets environment,” Moser says. Prime Group-sponsored funds are also generally active for six to eight years. “We build in discretionary extensions so that we are never forced to sell during a down economic cycle,” he says.
Prime sold the majority of the properties it acquired for Prime Storage Fund I in August of 2021. In all, the 67 assets sold for a reported $750 million. A joint venture of real estate investment firm Merit Hill Capital, affiliates of private equity firm Centerbridge Partners LP and Middle Crossing LLC, an affiliate of Singapore government wealth fund GIC, acquired the assets, according to the Albany Business Review. Fund returns were equal to 2.8 times invested equity, the according to the report.
Strong demographics should continue to support self-storage properties. “Millennial and Gen-X is using self-storage more than any other demographic,” says Weinstock. “Also the number of new properties under construction is declining as development costs increase, creating less competition.