When self-storage developers underwrote projects during the COVID boom, most planned for stabilization within two to three years. According to Tom de Jong, Executive Vice President at Colliers, that timeline now often runs to four or five years – a shift wide enough to open up new thinking about which exit strategy makes the most financial sense.
The result is growing developer interest in certificate of occupancy sales, where the building trades hands before a single tenant moves in and the buyer takes on the lease-up opportunity. For developers navigating today’s capital costs and absorption pace, the CO sale offers valuable price certainty in exchange for future upside.
How the Three-Tranche Exit Works
De Jong describes a tiered approach that merchant builders have refined over the past several years: sell entitled land, sell at certificate of occupancy, or hold through stabilization. Each stage carries a different risk profile and a different expected return.
“They would buy the land, take it through entitlement, and maybe they would offer the land for sale entitled,” de Jong says. “If they didn’t sell it, they would build it, and they would offer it for sale at certificate of occupancy. And if they didn’t sell it for their number, they would fill it, and then they would sell it.”
In practice, the middle tranche – the CO sale – has become one of the most valuable decision points, because it determines who takes on the lease-up period that now typically runs longer than earlier pro formas anticipated.
Why the Calculus Shifted
The essence of a CO sale is straightforward: the developer trades potential upside for price certainty today. What has changed is how much certainty the developer gains by exiting early.
“Recently, it’s taken four or five years to get to full stabilization at economic rents and full occupancy,” de Jong says. “So you’re taking risk off the table, essentially. You’re trading risk for a potential reward down the road.”
In a CO sale, the buyer typically prices the asset based on current market rents and current occupancy levels, then applies a discount to reflect carrying the property through lease-up. De Jong describes a representative structure: a facility with a stabilized value of $30 million might trade at $22 million at certificate of occupancy, with the buyer budgeting another $2 million in capital and interest reserves for an all-in cost of $24 million. The buyer captures the $6 million spread as lease-up executes as planned.
When lease-up runs four to five years rather than two to three, the value of a known outcome today grows – and the early exit increasingly looks like the smarter trade for developers who prefer certainty over holding costs.
The Chula Vista Deal
De Jong points to a recent transaction in Chula Vista, California, as an example of how CO structures work in complex, multi-parcel developments. The deal involved three adjacent parcels – small bay flex industrial, industrial outdoor storage, and self-storage – where shared access infrastructure cost nearly $10 million.
Rather than financing that road independently, the developers agreed to build the self-storage component to the buyer’s specifications and close at certificate of occupancy, with the buyer taking on the full lease-up opportunity in exchange for cost-plus pricing.
“The buyers felt there was enough margin in the deal to buy the building at certificate of occupancy and take it all the way through lease-up until it gets stabilized,” de Jong says. The arrangement also let the buyer control branding from the outset – door colors, signage, management platform – establishing a consistent identity from day one.
How Buyers Underwrite CO Deals
De Jong says buyers in CO transactions generally price based on where market rents and occupancies sit today, rather than where the seller’s pro forma projects them going. There is credit given for the gap between discounted move-in rates and eventual market rents once occupancy stabilizes – and that credit is meaningful, if partial.
“Is it 80 percent? Is it 60 percent? It’s certainly more than zero. It’s certainly less than 100,” de Jong says. “And every buyer will look at that slightly differently.”
The most straightforward asset to sell remains one that is fully stabilized at market rents – buyers pay a market cap rate for it because the outcome is already established. But for developers looking ahead to years of holding before reaching that point, the CO sale offers a known result today in place of a longer timeline and a future exit price.
“If you can get a number certain today versus a potential number in a few years, how much of that are you willing to give up?” de Jong says. “And that’s different for every individual or developer.”
For developers who built during the boom, the CO sale represents a clear and efficient path to recovering capital and moving on to the next opportunity, without waiting out a stabilization period that may extend beyond original projections. To learn more, visit Colliers.
About Tom de Jong: Tom de Jong is Executive Vice President at Colliers and Founding Principal of the De Jong Self Storage Team. With 19 years at Colliers, a $2B+ transaction record across 32 states, and an SIOR designation, he is one of the most recognized specialists in self-storage brokerage and investment advisory in the United States.
This article is based on information provided by the expert source cited above. It is intended for general informational purposes only and does not constitute legal, financial, or real estate advice. Readers should conduct their own research and consult qualified professionals before making any real estate or financial decisions.