The AAA Storage Podcast

Welcome to the AAA storage podcast,
your integrated real estate and

development partner, exploring all
things, self storage investing to

bring you diversified success.

Let's dive in.

Brandon Giella: Hello Paul and
welcome back to another episode

of the AAA Storage Podcast.

Thanks for joining us.

You guys just got back from the
Passive Pockets event, I believe

it was in Columbus, Ohio this past
weekend, uh, first weekend in May.

How did that go?

What was the big takeaway?

I'm so keen to hear.

Paul Bennett: Yeah, it was
a fantastic conference.

Uh, Brandon, it really was 150 investors.

that are passive investors who are
looking for opportunities and also

looking to learn, which is a big
part of passive pocket's mission.

Um, and so we had some great
interaction, uh, a lot of interest

in what we're doing and, uh,
which was, was gratifying and fun.

But we also, uh, there were a number
of sessions during the day on Friday

afternoon and Saturday where we got
some really interesting information and

some interesting perspective on the.

On the broader commercial real estate
market, and then selfishly kind of

where self storage fits within what's
happening across the broader market.

So it's a super valuable
weekend on lots of levels.

Brandon Giella: Good.

Good.

I love that.

I love going because you to
conferences like that because you

do get to meet people that are.

Peers and you know, people that you've
talked to a long time and never met

face to face, but then you get amazing
information from, you know, thought

leaders that are doing it every day.

So tell us what, what, uh, what kind
of insights did you glean from it?

I know today we were kind of
briefly talking about, um, how the

multifamily space might be doing
or what the outlook might be doing.

So I hope you have good news.

Paul Bennett: Yeah, well it, it was an
interesting, so gentleman named Brian

Burke, who's a well known author, he is
written a couple of books he's well known

and the real estate investing world, um,
and did a super presentation that really

crossed almost all of the different.

Real estate classes

Brandon Giella: Hmm.

Paul Bennett: uh, multifamily,
which you just mentioned to office,

to self storage to industrial.

Um, and he had some very
interesting insights

Brandon Giella: Hmm.

Paul Bennett: where, particularly
the multifamily, but it's,

it's really interesting.

It's kind of why I wanted
to talk about this today.

every sector of the real estate industry,
all the major sectors, multifamily

office, self storage, industrial,
are all going through somewhat of a

rebalancing often for different reasons

Brandon Giella: Hmm.

Paul Bennett: often at
different levels of intensity.

Um, but as he talked and he, you know,
shared some data and some insight, I,

I just, it made me really think about.

Sort of how the whole market is performing

Brandon Giella: Hmm.

Paul Bennett: self storage.

'cause you know, selfishly that's where
I always, my mind always goes that

Brandon Giella: Yeah.

Paul Bennett: industrial.

But we sit in, in that, that broader
perspective of what's happening

with commercial real estate.

So I thought it would be an
interesting conversation.

Brandon Giella: Yeah.

Yeah.

Good.

Uh, you were mentioning that, uh, it
might be hearkening back to maybe oh

8, 0 9, you know, that there's some,
there's some interesting, I guess, data

that is, is either concerning, troubling,
or maybe it presents an opportunity.

Paul Bennett: Well, it, that's
actually was the, the sort of

conclusion of, um, you know, the
old, um, Warren Buffett saying that

Brandon Giella: Mm.

Paul Bennett: be, be fearful,
when others are greedy and

greedy, when others are fearful.

Brandon Giella: That's right.

Paul Bennett: and what he really
talked about was the fact that

we're in a bottoming process in
most of the real estate markets,

Brandon Giella: Hmm.

Paul Bennett: levels of severity
and for different reasons, but.

Real estate is not like the stock market.

Um, it doesn't move as quickly, and it

Brandon Giella: really is

Paul Bennett: more about the bottoming
process than the bottom itself.

Brandon Giella: Hmm.

Paul Bennett: and I think one of
the things that he was telling

investors was, be patient.

Um, and, and I, he, he pointed to data.

I'll give you some of it since you

Brandon Giella: Yeah.

Paul Bennett: the oh 8 0 9 timeframe.

Brandon Giella: There's

billion dollars

Paul Bennett: of real commercial
real estate mortgages or

loans that mature in 2025.

Brandon Giella: And

Paul Bennett: 384 billion of that
are maturities from prior years that

somebody kicked the can down the road.

And now the maturity

Brandon Giella: wow.

Paul Bennett: is is 2025.

Um,

the distress rates.

particularly for multifamily, but really
across the board office and multifamily

lead the way, industrial, uh, little
bit behind them and self-storage

trailing all of them, but distress
rates and default rates have gone up.

And

Brandon Giella: And if you look

Paul Bennett: at the data in a graph
form, and he did this in his presentation,

um, the, the shape of the graph.

Brandon Giella: mm

looks

Paul Bennett: a lot like oh 08 09 0

Brandon Giella: man.

Paul Bennett: sort of pre the
systemic collapse that happened.

And, and, and to some degree,
if you have to be realistic,

some of where we sit today.

look like systemic risk if
you had a massive default.

Uh, the, the regional banks and and
smaller banks have already lost money in

real estate loans just in the two years
that we've sort of been in this process.

And so it, it does at some level,
represent a threat the same time.

It probably represents one of the
better opportunities to invest

Brandon Giella: Mm

Paul Bennett: 2012 as we came out
of that oh 8, 0 9 initial event.

And

Brandon Giella: mm.

Paul Bennett: several years
to kind of work through that.

Um, so like every other, you know, time
in, in investing history, that the threat

that exists also creates opportunity.

So he was not negative at all.

I think in, in, I'm skipping around
here, but in multifamily, he felt like.

The bottoming process had certainly begun.

It was early on, and you might
not wanna move too quickly.

Brandon Giella: Hmm.

Paul Bennett: Um, uh, in self storage
we see a, a different picture, uh,

and I'll talk about specifically in a
minute, but the bottoming process is

later in its stage and, and probably
closer to a time that it makes sense.

But I wanna go back.

Do you mind if I go back for a minute?

Brandon Giella: Let's
talk about each sector

and why

Paul Bennett: they are
in sort of a rebalancing.

Brandon Giella: Okay.

Paul Bennett: and I'll be quick,
multifamily, saw an explosion

coming out of during Covid and
coming out of Covid in demand.

Rent growth across the country
was through the roof, and that

spurred a lot of new development.

And what's happened is that
oversupply, uh, has caused rental

rates to actually go the other way.

Over the last 36 months,
rental rates have declined.

Defaults have risen, um, as some of
those new developments that had short

term financing, um, didn't hit their
lease up targets or their revenue targets

'cause rates were down and they couldn't
refinance to a more permanent financing.

Construction loans in that world
are typically fairly short term.

Offices struggle for a
completely different reason.

It's a

Brandon Giella: Mm.

Paul Bennett: don't need to tell anybody.

Listen to this, um, this podcast.

But the, the whole position of office
in the market shifted dramatically

with the reality of, of covid

Brandon Giella: And You

Paul Bennett: you know, working remote
and, and all that kind of thing.

So, um, you know, it's, it's in,
it's having difficulty, uh, for

a completely different reason.

Um.

Industrial saw a lot of the same dynamics
as multifamily, just not as severe.

There was a ton of demand as, as online
purchases went through the roof, um, as

the logistics and supply chain sort of
changed gears coming out of Covid and

there was a ton of industrial product

Brandon Giella: Mm-hmm.

Paul Bennett: again, some
vacancies, defaults, and

softness in, in rental rates.

Um.

Self storage really tracks with the
industrial sector and multifamily in that.

The pandemic caused an
explosion in demand, and we've

talked about that before.

Occupancy went through the
roof, um, for lots of reasons.

Obvious people creating offices
in their home and moving furniture

out, at home, cleaning out the
garage, the attic, you know, it just

occupancy went as high as 96, 90 8%

Brandon Giella: Mm.

Paul Bennett: with the low interest rates.

Uh, as we came outta Covid, that
spurred a lot of development, the

self storage industry, which then
again re resulted in oversupply in

some markets, softer rental rates.

And then you add on that in the
case of self storage, the fact

that when interest rates went up.

People couldn't afford to buy a new home
or, or they didn't wanna sell the home

they own with a 3% mortgage and trade
it for a 7% mortgage on a new home.

And moving was 25% of the value
of the demand in self-storage.

So self-storage saw the sort
of covid explosion, overbuilt

dynamic, plus the impact of, of
people not moving as frequently.

Brandon Giella: Yeah.

Paul Bennett: Um, and, and so it's
created a very interesting scenario.

Um, multifamily does seem to be bottoming.

Um, it seems to have, have sort of
reached a point of stabilization.

Rent declines are, are decelerating.

Brandon Giella: Hmm.

Paul Bennett: Office is in
an interesting place to me.

Uh, a lot of office stuff
is being repurposed.

Um, you're seeing the ongoing battle
between employers and employees, employers

demanding people return to the office,
and employees sort of resisting that.

Um, the office market has
actually done a little bit better

than a lot of people thought.

I think.

Brandon Giella: Hmm.

Paul Bennett: a year and a half ago,
I think there was some real concern

that there were gonna be huge defaults,

Brandon Giella: Yeah.

Paul Bennett: that would really
rock the financial markets

that hadn't happened yet.

Brandon Giella: Yeah.

Paul Bennett: self storage and industrial
sort of duck through a down period

with soft rates and a little bit of
oversupply, and both industrial and self

storage are coming out of that fairly
well in, in the self storage markets.

We saw year over year rate declines
month to month for 28 months in a row.

Brandon Giella: Hmm.

Paul Bennett: Um, in, in January,
that rate decline data went neutral

for the first time in 28 months,

Brandon Giella: Wow.

Paul Bennett: February and March.

Rent growth was actually positive,

Brandon Giella: Hmm

Paul Bennett: on a national
basis and in most major markets.

I haven't seen the April data,
but I, I'm gonna bet that it's

probably positive as well.

We're seeing a lot of leasing
activity in the existing portfolio

that we, that, you know, we manage

Brandon Giella: mm-hmm.

Paul Bennett: a day-to-day basis.

And industrial's done
the kind of same thing.

Brandon Giella: Interesting.

Paul Bennett: New development
and storage is down.

40%

Brandon Giella: Mm.

Paul Bennett: indu, new development
industrials down over 43%.

So as the market stabilizes and that
oversupply is absorbed, but interest rates

are still high for developers, you're
not seeing a lot of new supply come back.

Um, which is a thesis we've talked about
numerous times, which is kinda why.

We are trying to be greedy when other
people are fearful and developing into

the current environment in self storage in

Brandon Giella: Yeah.

Paul Bennett: But it's a really
interesting picture and a really

interesting, um, uh, dynamic.

Brandon Giella: Yeah, yeah, yeah.

I'm glad to see that you saw this
presentation from a thought leader that.

Spurred some, some interesting insights,
but it's also validated in the data

that you guys see on the ground with
your own portfolio, your own thesis.

I mean, that's a really exciting time
to feel like the, the worlds are kind

of aligning and you guys have this more
or less clearer picture about what you

know, the kind of world that you're
heading into, which is really nice.

Paul Bennett: Well, we've made a
pretty big bet in fund one and now

in fund two on the thesis, that
development will remain depressed.

The markets will stabilize and
there'll be a window of time in

the 26, 27 through 2030 timeframe,

Brandon Giella: Hmm,

Paul Bennett: where a lack of
new supply and pretty consistent

demand will create premium values

for

Brandon Giella: self-storage projects and

Paul Bennett: small bay
industrial projects and.

so it's, I sleep a little bit better at
night when, when data points get confirmed

Brandon Giella: Yes.

Paul Bennett: party.

But I think one of the most interesting
things about it was we look at all

the real estate data because it,
it's all related to some degree,

but I, I won't be untruthful.

We're super focused on storage and
industrial and it was really interesting.

Just to kind of walk through the data
and hear from somebody that really

knew what they were talking about
in some areas that we don't look at

with that level of detail, you know,

Brandon Giella: On a regular

Paul Bennett: basis.

Multifamily office, retail, um,
those are sectors that we certainly

are aware of and track, but we
don't, we don't dig into 'em.

The way Brian dug into 'em, in
the information he, he shared.

Brandon Giella: Cool.

Cool.

Okay, so zooming out a bit, I, I
want to, I, I love to draw on your

wisdom because you've, you've done
this, you've been through many of

these kind of cycles over the last.

Four decades you've been, you've been
investing in these, these worlds.

So I'm curious to hear from you if you
could summarize, um, I guess this story

that is kind of unfolding right now, given
your wisdom, given the data that you know,

and your portfolio and, and all of that.

But how, how would you summarize or how
would you kind of paint this picture

of what to expect or take away from?

The conversation that you had in passive
pockets and, and now kind of relaying now,

but is, is the story we are going through
this period that may look like oh 8, 0 9.

Nobody knows.

We're not predicting the future, but
we're, we're going into this, this

story that could unfold that way.

And so the takeaway is be
patient, have a lot of liquidity.

Go into this next period with looking for
opportunities or, I mean, how would you,

like, in one sentence or two sentences,
how would you, kind of like, what advice

or wisdom or or story would you make of,
of what you guys are seeing right now?

Paul Bennett: I, I.

The first thing is, I think
it's interesting that there are

externally driven down cycles
self-inflicted wounds, or

Brandon Giella: Hmm.

Paul Bennett: driven cycles.

as a group, we're not real smart, right?

When the conditions are good and the
market looks great, we build too much

stuff, and then that results in, you know.

Trouble leasing it up
and softer rates and,

Brandon Giella: Sure.

Paul Bennett: we do it
to ourselves sometimes.

Brandon Giella: Mm-hmm.

Paul Bennett: and then there
are the external events with 2

8 0 8 0 9, um, covid, whether it

Brandon Giella: Covid.

Paul Bennett: impact or a negative

Brandon Giella: Mm-hmm.

Paul Bennett: are different kinds
of things that you have to react to.

And, um, but they're not self-inflicted.

This to me, uh, and I'm certainly not
the expert, does not feel like oh 8 0 9.

Brandon Giella: Hmm.

Okay.

Paul Bennett: it's the
level of systemic risk.

If you think about where the, where some
of the really big problems came from oh

8, 0 9, it was mortgage backed securities.

Brandon Giella: Yeah.

Right.

Paul Bennett: and, and a market that
was, and a lending on the consumer side

that where you could get a mortgage.

If you fogged a mirror, literally you'd
give 'em your name, address, and phone

number and sign on the bottom line,
and you could get a 400,000 mortgage.

Brandon Giella: I've heard,

Paul Bennett: and, and so the,
the, the losses and the damage

was so much more widespread

Brandon Giella: yeah.

Paul Bennett: even $957 billion

Brandon Giella: Hmm,

Paul Bennett: real estate loans.

Brandon Giella: hmm.

Paul Bennett: so it, it doesn't
feel like oh 8, 0 9 to me.

Brandon Giella: That's good.

Paul Bennett: again, in every
sector the reasons are different.

I think these are pretty common,
um, parts of the ebb and flow of

real estate values and activity.

Um, so I, and therefore I.

I think what you said is exactly
the right, um, way to approach

the market as an investor.

And that's with patience

Brandon Giella: Hmm.

Paul Bennett: and the degree of
patience you need to have depends on

which sector you're going to invest in.

Brandon Giella: Hmm.

Paul Bennett: Um, I think right
now it's a little early for

multifamily, although it's starting
to show signs of some promise

Brandon Giella: Hmm.

Paul Bennett: in certain markets.

Um.

I think over the next two years,
you're gonna see multifamily

swing into a much better place.

Brandon Giella: Okay.

Paul Bennett: industrial and self
storage are really already there.

I think we're, we're at the cusp of what
will be the next upswing in values and,

um, and, and, and operations office to
me is still a little bit of a mystery.

I, I think it's still a
little bit hard to tell.

Where that's gonna land at the end of

Brandon Giella: Yeah.

Paul Bennett: But I, so I think
the degree of patience you

need to have sort of varies.

Um, and knowing that across the board
we are in, in a bottoming process at

or near the bottom of a cycle, the
smart thing to do is have liquidity

Brandon Giella: Hmm.

Paul Bennett: it over
the next couple of years.

Brandon Giella: Okay.

Paul Bennett: of dollar cost
average over the, the, the, this

bottoming of the market and maybe
the early part of the uptick.

Um, and, and I think that's a
way to sort of mitigate your

risk even a little further.

Brandon Giella: I like that.

I like that.

Paul Bennett: Um,

The conversation that Brian had
was really built around the idea

of, of buying existing real estate.

He, he was real, that that's
how most people invest

Brandon Giella: Mm-hmm.

Paul Bennett: right?

They're, they're gonna buy, they're
gonna, they're gonna invest with a sponsor

who's buying an existing multi-family
project or industrial project or,

and one of the things he talked about
was the impact of negative leverage.

You, you don't want to invest in an
environment where the, the cap rate.

That you're buying the property
at is lower than the interest rate

that you're paying on the debt
that you use to buy the property.

So, you know, in today's environment,
if you're lucky, you're borrowing

money at seven and a half or 8%.

And, um, you know, if you're invested
in multifamily, cap rates have

expanded and they're, you know, now
back up into the sixes, high fives.

Uh, but there's negative levers there.

You're, the yield that you're buying
is a lower yield than the, the what?

The cost of the debt.

Brandon Giella: Okay.

Paul Bennett: I think that's
a situation you wanna avoid.

I, I absolutely agree with Bri Brian, but
the thing that's different in development,

if you remember, we developed to a
nine and half percent yield on cost.

And I'm borrowing money
all day long at 7.5%

today, wall Street Journal Prime.

as a developer, we have positive
leverage, not negative leverage.

I've got a two point positive spread
between my cost of debt and the yield.

And the other thing that you have
to think about is the fact that, um.

Our properties in terms of
their value, when that value is

important is four years from now,

Brandon Giella: Hmm.

Paul Bennett: um, not tomorrow, and which
will be a different market at some level.

I don't have a crystal ball.

I can't predict it, but, um, if
you bought a property three years

ago in the self storage industry
and you bought it at a a six cap.

and, uh, three years ago you might
have bought it at a five and a

half or five and a quarter cap.

you bought at a five and a quarter cap,
or five and a half cap, and you've seen 28

months in a row of your rates declining.

So income has come down and
cap rates have expanded.

Today you're about 35% in the whole,
that the value of that property is 35%

less than what you paid for it three

Brandon Giella: Hmm.

Hmm.

Paul Bennett: Um.

You'll climb out of that hole,
but it's gonna extend whole times.

It's gonna, it is gonna be a different,
you know, a different investment than

maybe you thought it was gonna be.

Brandon Giella: Hmm.

Paul Bennett: the development world, um,
we're developing to a nine and a half

percent yield, and our values really
don't come into focus for four more years.

'cause that's how long it takes us to
get a project finished and leased up.

So you're really sitting in
an entirely different seat.

Brandon Giella: Hmm.

Paul Bennett: this market as a
developer or an investor in development

than you are, if you are, you're,
you're buying existing assets

and existing cash flow streams.

And I think that's something
people don't often think about.

They, they focus on the perceived
risk of development and there is some

incremental construction risk and
lease up risk, but they don't see.

How much more well positioned

Brandon Giella: Hmm.

Paul Bennett: in in development
are than buying existing assets

in certain market conditions.

Brandon Giella: Hmm.

That's so fascinating to me because
I, I am not an expert real estate

investor, so to hear you talk
about with such, um, precision,

obviously the different classes.

And the different data that you're
seeing, the different time periods,

but also even within those classes,
there's different ways of getting

into an investment, whether you buy
a, an existing property or you start

from the ground up like you guys do.

And yeah, it's just fascinating to
to hear the, the way that you're

thinking through these investments.

'cause it helps me understand like,
okay, this, yes, real estate is this way.

You read in the Wall Street Journal,
you know, headlines such and such data.

But when you really start digging
into it, it's actually very different

picture than you'd be led to a belief.

Paul Bennett: Yeah, and you can add
complexity to that even more no matter

what asset class you're talking about.

The market that you're in matters.

You can talk about national
statistics all you want,

Brandon Giella: Yeah.

Right.

Paul Bennett: of the fact that
a lot of people would tell

you multifamily has been a bad
investment over the last three years.

I promise you, without too much
work, you could go find some guys

and ladies that invested in the right
market and have done pretty well.

Brandon Giella: Yeah, yeah, yeah.

Yeah.

Paul Bennett: it's, it's on
top of all that complexity is a

whole nother level of complexity.

'cause we all know the old say, and
the only thing that matters in real

estate is location, location and

Brandon Giella: right.

That's right.

And we've talked about on another episode
how you guys have these hyper-local

markets that you, that you really
pay attention to when you're thinking

about these different properties.

Paul Bennett: Yeah.

In a, in a period where generally
people would say self storage, lease

up has slowed and rates have been.

Um, depressed.

We've got a project that we cod in
June of 24 that's averaged eight

percentage points of occupancy a month.

from June until April, uh, is now 55%.

Um, occupied and rates on average are
probably 5% above what we projected,

Brandon Giella: Amazing.

Paul Bennett: market,

Brandon Giella: Yeah, I love it.

Paul Bennett: um, and even a blind
hog finds an acre every now and then.

So,

Brandon Giella: Every now and then.

Paul Bennett: Uh, but no,

Brandon Giella: I love that.

Paul Bennett: hopefully that was
intentionally not a blind hog,

but I mean, it's, it just exists.

And so at the end of the day,

Brandon Giella: Yeah,

Paul Bennett: as a real estate
professional, you have to factor

all that in and you have to consider

Brandon Giella: that's right.

Paul Bennett: the macro economics,
um, the national trends.

But then you also have to kind of
bake in what the local market's doing.

'cause it may be, know,
counterintuitive so.

Brandon Giella: Yeah.

Yeah.

Well, what do you guys have, uh,
coming up, uh, things that you

guys are paying attention to?

Uh, aaa, your team, is there any kind
of like, you know, data reports that

you're, you're paying attention to
or, or anything that's coming up soon?

Maybe there's more events
or something like that?

Paul Bennett: I I look at the, the,
no, no events for us right now.

We, we just

Brandon Giella: Yeah.

Paul Bennett: fund two as you know,

Brandon Giella: Yeah.

Paul Bennett: busy right
now kind of head down.

Um, getting all of that information
out the door and talking with folks.

I had actually our first, my
first call, which I do frequently

with a prospective investor, um,
last night about five o'clock.

Um, and some folks that
had invested with us.

Previously that reached out sort of
outta the blue, not knowing we had

just launched fund two and, and we
were looking for an opportunity, but,

Brandon Giella: Cool.

Paul Bennett: I was super busy with that.

Brandon Giella: Well, I, for one,
am very glad that you and your team

are doing this, uh, because I don't
have the time or the expertise

to, to look at all this stuff.

So thank you as always.

For your insights and, uh, and
keeping us updated on what's

going on in the real estate world.

'cause um, yeah, it's, there's
a lot of complexity to it.

There's a lot of things that you can miss
if you're not paying close attention.

And so you guys go to these conferences,
you read all the data, you read the

stories, look at your own portfolio
and, and kind of report back.

And it's always super helpful.

So Paul, thank you.

Paul Bennett: Thanks Brandon.

Always fun body.

Brandon Giella: All right, man.

We'll see you next time.

Paul Bennett: Yep.