Hi {{first_name | there}},
Each Tuesday, I send a short note on commercial real estate to help you be a better investor. Topics may include deal stories, how I'm thinking about risk, lessons I'm learning, and market observations as we oversee our $500MM+ CRE portfolio and serve our 1,100+ investors.
This week, I want to share the biggest lesson from our second-worst self-storage investment.
The Deal Looked Great
In April 2019, we invested in a self-storage development deal in a wealthy suburb of a large Midwestern market. For context, this is the only ground-up development deal we've ever invested in.
I visited the site during due diligence and came away impressed by the local growth and demand story. The market checked nearly every box. Average household income exceeded $95,000. There was very little self-storage supply, with fewer than 3 square feet of storage per person within a 5-mile radius, compared to the national average of about 7. No new self-storage projects in the pipeline in the area.
The lead sponsor had been investing in self-storage since 2005 and presented experience across more than 30 self-storage deals.
We did not press hard enough on what he had personally done on those deals or how much of the results he had directly driven. He also invested very little of his own capital in this deal. In hindsight, we should have focused more heavily on those items in due diligence.
Construction was not the problem. The facility was completed two months early and approximately $500,000 under budget. It opened in June 2020 and was a beautiful, modern, climate-controlled facility with over 800 units.
What Went Wrong
Opening in June 2020 (middle of COVID lockdowns) certainly made the initial lease-up more difficult. But that was not the primary reason the investment underperformed.
The operator did not have strong enough people on site. There was no real asset management function, no consistent set of KPIs, and not enough attention to property-level details.
Expenses ran too high. The facility leased too slowly. Weak staff performance was not corrected quickly enough.
The Exit Opportunity We Did Not Know About
Despite the property's underperformance, 2021 and 2022 were very good years for self-storage nationally, with tons of capital chasing self-storage deals and low interest rates.
How good was the market? In late 2021 (about 2.5 years into the investment), the sponsor received an off-market offer that would have produced an equity multiple of ~1.7x (a great result for investors).
The sponsor rejected the offer because they believed the property would be worth much more after another year of leasing and NOI growth.
We did not learn about the offer until months later.
Rejecting that offer was not automatically the wrong decision. But it depended on the sponsor's ability to execute the remaining business plan and on favorable market conditions continuing. We had no opportunity to weigh in.
The Result
The property reached a high of ~84% physical occupancy in September 2023, but at below-market rates. The gains did not hold. As the self-storage market softened and operator performance worsened, occupancy fell to ~66% by the end of 2024.
We became heavily involved with the sponsor team and property decisions in 2023 and pushed for a sale. We would have (and should have) gotten involved sooner; however, we made the mistake of believing the sponsor's stories: "We're right around the corner."
The sale finally closed in March 2025.
The result: a 1.0x multiple on invested capital and a 0% IRR over roughly six years. The property sold at roughly a 2.5% cap rate on trailing NOI. Because it was not stabilized, the buyer was paying for future potential upside, not just the existing cash flow.
Original projection: Over 2.5x equity multiple, 20.8% IRR, 6-year hold time.
The Lesson
We focused too much on the property, market, and projected returns. We did not adequately vet the sponsor's team or their track record of execution.
A sponsor’s track record is just a starting point. Before investing, dig deeper:
Who owns asset management for the subject property and what is their process? Ask for the names, roles, and incentive plans for the people directly accountable for leasing, expenses, staffing, and the business plan. Ask them to walk through the actual process they use to manage a deal in their portfolio. Request a sample asset management report.
What did the sponsor personally do on prior deals? Ask about the sponsor’s actual role, capital invested, decisions controlled, and whether former partners or investors can verify the result.
What happens when execution falls short? Ask for a real example of when the sponsor identified and replaced an underperforming property manager or employee.
How are major decisions communicated? Ask for examples of how previous investors learned about a meaningful sale offer, refinance opportunity, budget miss, or management problem.
The asset type, property, debt, and market all matter.
But the people actually running the property matter more.
What We Changed
This experience is one of the reasons our due diligence process now covers 26 areas, including verifying track record and current portfolio, principal co-investment, asset and property management structure, reporting standards, and much more.
This sponsor would not meet our standards today.
All the best,
Ben Kahle
Managing Partner | Wellings Capital