Market Monitor

Looking back at the first 6 months of 2012, there is no doubt that the real estate transaction market has improved significantly, and along with it, the pressure to overprice properties has increased. This is due primarily to the two most critical factors that affect a fluid transaction market; the ability to finance an acquisition and the buyer’s and seller’s perception of fear or greed in the market.

It’s time for some good news! As the economy slowly improves, we have observed an increase in rental rates and occupancy of self storage properties around the country.

Typically, a real estate transaction can be described as “one party’s gain is another party’s loss.” There is, however, a very unusual situation that exists where both buyer and seller can win in a transaction. Today, the current economic climate makes this traditional confrontation more accommodating so that both buyer and seller can achieve their goals in a sales transaction without hurting the other party’s position.

While we strongly believe that the performance of self storage as an investment in the long run is quite positive, we have reason to believe that the game has changed.

As we close out February, we are starting to receive positive year-end data from 2011. While the last few years have been difficult for most of the commercial real estate market, self storage proved to be very resilient. All four of the self storage REITS reported same-store gains in Net Operating Income (NOI) from Q3 2010 to Q3 2011 (PSA +9.8%, EXR +7.3%, CUBE +7.9%, SSS +7.9%). The question is, did you enjoy the same increase in your NOI?

As the New Year begins, we are seeing the transaction market show signs of equilibrium which have not happened in the last few years. It appears that buyers have regained confidence; they are being more disciplined with their assumptions…

The last few months of 2011 were markedly different than the first 6 or 7 months of the year, especially for the real estate business and self-storage properties. Liquidity in the real estate debt market slowed in the third and fourth quarters of 2011, led by the CMBS market mid-year, and in general, banks lived up to their “scrooge” reputation by dragging their feet on making new loans.

“I wish buying and selling real estate was easier” is a common sentiment I hear from my clients as they engage in the transaction process to buy or sell a storage facility. Consummating a real estate deal is tough. Besides agreeing on the most salient transaction terms such as price, earnest money, and financing, there are less prominent details that have to be sorted out. One of these items is past due rent – who gets to keep it, the Buyer or the Seller?

In my recent conversations with self-storage owners, I have noticed that the majority are enjoying stabilizing revenues, and in some cases they are also enjoying an increase in revenue over the last 6 to 12 months. Interestingly, most owners don’t realize that they have made or lost money because they are in the real estate business and not the self-storage business. While the increase in revenue is creating more cash flow for owners, today the real opportunity lies in the arbitrage that a real estate investor can capitalize on between cap rates and interest rates.

If you read the last issue of the Market Monitor, it is apparent that the fundamentals of the self-storage business are sound. With all four of the major self-storage REITs posting positive growth numbers over the same quarter last year it is clear that the industry is poised to move forward.

The economic and political roller coaster of the last month has been devastating not only to the stock market but also to the overall investment market, including commercial real estate. The fear and greed that motivates investors to take positions either to protect their investments in uncertain times or capitalize on what they perceive as opportunity has been frozen by the overall volatility in the market over the last month.

The availability of commercial real estate capital continues its expansion across all sectors with the CMBS market seemingly running at full steam (although nowhere near the peak in 2007) and life insurance companies already exceeding annual loan volumes year to date compared to recent years. Loan pricing competition is fierce for low leverage (sub-60% loan to value) transactions across all property sectors and higher leverage (75%+ loan to value) loans are generally available for multi-family properties in strong markets, as well as dominant grocery anchored centers and institutional quality multi-tenant bulk warehouse properties. Self-storage and hotels are receiving more attention from conventional lenders, although recent operating history is critical to the underwriting process.