Fairway America targets $100 million for big box to self-storage conversions

Kerry Curry
June 3, 2019

Fairway America, founded in 1992 by Matt Burk, CEO and chief investment officer, invests in small balance real estate (SBRE) deals and manages its own discretionary SBRE funds. During its history, it’s helped to structure and create over 150 funds and syndications for SBRE entrepreneurs around the United States.

Earlier this year, it created the Fairway America Value-Add Self-Storage Fund to raise money to buy vacant retail big boxes and convert them into self-storage facilities. SpareFoot recently talked with Burk about the fund and the self-storage industry.

SpareFoot: Why is self-storage a good bet for investors at this point in the real estate cycle, or is it?

Burk: “Self storage is a solid performer in a down market so if people believe a down market is coming, self-storage has shown itself to stand up well. There is some oversupply and overbuilding in certain areas, but this industry is very much a micro business with a three to five-mile radius so even though certain markets may be overbuilt others may be undersupplied. Done right, self-storage stands up as well as any real estate asset class. And when economic times are good, it can also perform well.”

SpareFoot: How do industry fundamentals look for the remainder of 2019?

Matt Burk, CEO and CIO of Fairway America.

Burk: “We are seeing lots of supply coming online and slower rent growth, but in the next year or so, the pace of new stores being added will start to drop. All in all, it’s generally business as usual although there are market-by-market nuances.”

SpareFoot: What’s your strategy with the Fairway America Value-Add Self-Storage Fund?

Burk: “Over the last two and half years, we’ve encountered a number of sponsors who were executing a strategy of acquiring large vacant big box stores and converting them into self storage. The more we looked at that model, the more we liked the economics. With the disruption in the retail sector, these properties are being sold at very attractive prices. We syndicated four or five deals and that was the impetus for the fund. We decided to form a dedicated investment fund so that we can act quickly with committed capital when we find a property we like.”

SpareFoot: What’s the status of the fund?

Burk: “We launched the fund in late March and needed to raise $10 million in capital commitments in order to break escrow, which we did this week (early June). We are just north of $10 million and are in discussions with several investors about very sizable commitments that would add significantly to that number. We’ll start acquiring our first properties over the next few months. Our raise period is 12 months from the time we broke escrow so we have another 12 months to raise the remaining $85 million or so. I suspect we will hit $100 million or come close. If we are successful in raising the entire $100 million, the fund will end up owning approximately 15 to 20 properties.”

SpareFoot: Are your commitments all from small-balance real estate investors?

Burk: “Our investor base is largely high net worth accredited investors, qualified purchasers and family offices. That’s our bread-and-butter. We may end up with a few that are quasi-institutional investors but the majority of the capital will come from the investor base I just described.”

SpareFoot: What markets are you targeting for acquisitions?

Burk: “We are looking across the United States. We’ll look at major metropolitan areas around the country that have vacant big box retail and a need for self storage. We’ll look at all the metrics that investors use to acquire self storage: Rooftops, population, income, etc. We’ll pay closer attention to those metrics than which city we are in.”

SpareFoot: “Why are big boxes more attractive to Fairway America than building from the ground-up?”

Burk: “Fairway has a value-investing mindset. In the case of these vacant big boxes, we work with sponsors who are acquiring 80,000 or 100,000 square feet of building and five to eight acres for an extremely low price and effectively doing tenant improvements on them  — building out the interior with self-storage units. We may have to repaint, re-skin the building or improve the parking lot but your all-in cost to get to the finish line on a class-A climate-controlled facility is generally 20 percent to 40 percent less than building from the ground-up.”

SpareFoot: Who are your competitors?

Burk: “There are a number of regional players that have done this and there are a lot of small sponsors pursuing it, but it’s fragmented. There is no one player dominating the market. I have not heard of another fund that has been set up to target this specific strategy although other funds are investing in self-storage as an asset class. There certainly has been more attention on this strategy, lately, however. I saw that U-Haul bought several shuttered Sears and Kmart stores late last year with plans to convert them.”

SpareFoot: Will you hold or sell the properties once you finish the value-add?

Burk: “The plan is to convert, lease and stabilize the properties before considering a sale. It’s also possible that we might sell the whole portfolio in bulk or we may sell them one at a time. Another option would be to hang onto them and let them cash flow. I like that we have multiple exits and possibilities.”

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