Comparing a storage fund that develops against one that buys operating facilities

I read your post twice and I think the part I keep stumbling on is the word occupancy, because it's doing different work in each deck. In the development one it's a thing that hasn't happened yet and the whole return depends on it arriving on schedule. In the acquisition one it already exists and the sponsor is saying they can make it worth more.

What I don't understand is why anyone would build when there are already facilities you can buy. Is it that the sellers won't sell at a price that works? Or is building genuinely cheaper per square foot than what finished ones trade at right now? Those feel like very different reasons and I can't tell which one the developer is actually relying on.

Also, when the develop fund says lease-up pays very little, does that mean zero for two years? I'd want to know that before I understood anything else about it.

Juniper, taking your question first, since it's the one that makes the rest legible.

A developer builds when the cost to build, land plus construction plus carry during lease-up, comes in below what a finished, occupied facility sells for. That gap is called the development spread. When existing facilities are expensive relative to construction costs, building looks good. When construction costs rise or finished assets get cheaper, the spread compresses and developers stop breaking ground. Steel and sitework costs have been under pressure, so that math is tighter than it was.

An acquirer is buying an income stream. The price is usually described as a cap rate, which is the property's annual net operating income divided by the purchase price. Buy at a 6 cap and you're paying about sixteen and a half times one year of income. The acquirer's return comes from that income, plus whatever they can add by raising rates and occupancy or cutting cost per facility once they run many of them on one platform.

On distributions during lease-up, a new facility genuinely produces little for a while. A facility opening from zero typically takes somewhere in the range of two to three years to fill, and the fund is paying loan interest and taxes the whole time. Some funds pay nothing then, some pay from reserves or a construction loan, which isn't the same as paying from operations. Ask the sponsor in writing which one they mean.

Both strategies are exposed to the same demand picture. Storage demand leans heavily on people moving, and a slow housing market slows that down.

Whichever one I'd rather hold, I'd want to know who actually answers the phone at 7pm when a unit's alarm trips.

Sable, the two decks read as opposites, and in substance they are the same bet placed at different points on a timeline. The developer is making an occupancy assumption and getting paid to be right about it in three years. The acquirer is making an occupancy assumption and paying for it up front. Both live or die on whether people show up to rent units in that submarket. What to chase in both is the supply page. For the developer, how many competing square feet got permitted within three miles in the last eighteen months, because they do not control who breaks ground next to them after they have committed. For the acquirer, same question, plus what the seller's street rates have been doing for the last year. If a single-owner seller has been holding rates flat to keep occupancy at 92, then the acquirer's whole improvement story is just repricing existing tenants, and existing tenants leave when you push them too hard. The earlier point about paying distributions from a construction loan is the one to read the LPA for. Money that was borrowed and handed back to you is your own runway, whatever the distribution notice calls it. I lean toward the acquisition side, mostly because you can verify something that already exists. But operators have underwritten 8% rate growth on an acquired book and collected 1.5%, so verifiable does not mean safe.

The question you're asking gets sharper if you stop comparing strategies and start comparing which line item carries the return. On the development deck, pull out the untrended yield on cost. That is stabilized net operating income divided by total project cost, before any assumed rent growth. Compare it to the cap rate they are using for the exit. If yield on cost is 7.2 and the exit cap is 6.0, they have about 120 basis points of spread and the deal works even if nothing improves. If yield on cost is 6.4 against a 5.9 exit, the entire margin is rent growth they have not earned yet, and an overrun of 10% on hard costs eats it. Ask them what construction contingency they carried and whether it is a fixed-price contract or cost-plus. Ask what happens to the interest reserve if lease-up runs six months long, because that is the most common failure mode in this structure. On the acquisition deck, the number is same-store revenue growth in the trailing twelve months of the actual assets rather than the sponsor's portfolio average. Then ask what the existing customer rate increase program looks like and what move-out rate follows it. Storage operators can generate a lot of revenue growth on paper by raising in-place tenants 9% twice a year, and the cost shows up in vacancy two quarters later. Bramble is right that both bets are the same demand assumption. The difference is that the development one is undiversifiable in year one and the acquisition one is priced today. Underwrite both on their own terms. The development spread is where the bigger miss usually lands, because construction costs move faster than anyone re-forecasts them.