Market Monitor

Looking back over 2013, most self-storage operators are continuing to bask in their own glory, and in general self-storage properties continue to improve. It is now time to look into the crystal ball and position yourself for success in 2014. After exhibiting an incredible pace of recovery since 2009, the self-storage real estate sector will likely slightly slow or flatten out during the coming year.

It has been an extraordinary time for the self-storage business over the last few years, and as you may recall, I have suggested that now is a good time to buy, sell or refinance. Sounds good all the way around, RIGHT? Today’s low interest rates and strong fundamentals have made good deals even better, and the cash on cash returns are simply staggering for owners, buyers and sellers alike.

The recent success of the self-storage industry has been well-documented by industry analysts and real estate professionals, but by and large, the information is derived from the performance of the self-storage REITS. While these large operators have been responsible for a tremendous amount of the growth in our industry, we wanted to gain a better understanding of how this market “boom” was affecting independent self-storage operators throughout the U.S. While we believe the self-storage industry is certainly deserving of its recent accolades we also know that it takes more than just “riding the wave” for an operator to maximize their investment.

In today’s dynamic self-storage business environment, many independent owners are forced to compete with larger, better capitalized and more sophisticated self-storage operators. Most owners consider the REITs to be the largest competitors in their markets, but we are now seeing the regional players grow to a level that leaves the local independent operator with several large formidable competitors. So the question has become how can an independent self-storage operator take on the giant corporations and not only survive but make a profit?

These days, it is easy to spot the signs that summer is coming to an end. School supplies are on sale and kids everywhere are trading beach towels and skateboards for backpacks. However, I am not nearly as confident that the run-up in real estate values is over yet. We have seen a 100 basis point uptick in interest rates over the last 6 months and shockingly, cap rates seem to still be coming in. Please forgive my optimism, but I think that real estate fundamentals are strong, especially self-storage fundamentals, and the increase in value that self-storage owners have enjoyed seems to be strengthening.

As a result of Federal capital gain tax rates that are 58% higher compared to last year, 1031 exchange activity is up significantly. According to a recent July 2013 article in the Wall Street Journal, High Impact Tax Breaks, 1031 exchange activity has increased by as much as 50%. Many self storage property owners are experiencing price appreciation. The increase in self storage property prices, coupled with higher tax rates, has resulted in property owners facing a big tax bill.

During Argus’ 19-year history in the self-storage business, the perception about the industry has changed dramatically along with the profile of self-storage investors. Gone are the days when almost ALL self-storage investors were entrepreneurial, mom and pop investors who looked to benefit from their ability to effectively manage these assets. Today’s investors take a more institutional investment approach.

As the only national brokerage firm that specializes in self-storage properties, Argus is presented with unique market data as it relates to the self-storage investment market around the country. Because of our recent market observations we are compelled to share with you our insight which will allow you to “do what must be done” to reach your investment goals.

Spring is upon us and so are new opportunities in the self-storage real estate business. Over the years we have experienced the peaks and valleys of the real estate cycle and it is apparent today that we are certainly on the way up, if not at the top. This has allowed many owners, investors and self-storage professionals to enjoy the benefits of the rising real estate values. However, it has occurred to me that many owners and investors simply don’t understand what value a broker brings to a transaction when they are buying or selling a self-storage property.

While self-storage owners are enjoying a surge in occupancies, revenues and most importantly, property values, the U.S. economy continues to work through some messy politics while still registering modest growth. In the face of tax increases and the sequester budget cuts, the U.S. GDP is still on pace to grow around 2% in the first quarter of 2013. Self-storage continues to benefit from the mobility of the U.S. population with more than 36 million people relocating in 2012, an increase of 2.5% from the record low of 35.1 million in 2011, according to the U.S. Census Bureau.

Because we are in the business of helping our clients buy and sell self storage properties all around the country, it is often difficult to answer the fundamental question that seems to come up at the end of almost every conversation: What are cap rates today?

It is very clear that the fiscal cliff bill was one of the largest economic and political issues to face the country in more than a decade. It is also concerning that the bill was drafted over a long weekend by sleep-deprived politicians and then agreed to by what seems to be two very adversarial political parties. In short, this solution may only be a Band-Aid for the current issues facing the country as it leaves many big issues unresolved.