Self-Storage operators have often declared their facility is 90% occupied, but did you know there are three ways to express occupancy; physical, unit and economic? Physical occupancy is based on the percentage of leasable square feet that is occupied. Unit occupancy tells what percentage of total available units are rented. Economic occupancy is the most revealing and most relevant metric for a self-storage operator.
In the business of buying and selling self-storage properties around the country, the discussion with both buyers and sellers always ends with cap rates. Unfortunately, most people don’t fully understand all of the ramifications of this simple-sounding number. It is also clear that we have many new investors in the marketplace who have never bought an income producing property and are just learning the basic math.
Today’s real estate climate offers real opportunities for experienced self-storage owners to pick up some nicely priced, quality built, well-occupied properties, earn a handsome cash on cash return, and yet have significant upside potential as the market continue to enjoy strong supply and demand fundamentals. However, it is not a time for amateurs.
In these very optimistic times, many owners are giving some thought to selling their property rather than waiting out the market. Trying to squeeze out every last penny comes with the risk of going on the always bumpy ride of the next real estate cycle. Real estate prices have been gradually increasing over the last several years and self-storage has continued to be the shining star of “niche” real estate sectors.
Self-storage is starting the year with healthy overall occupancies and all of the self-storage REITs are touting historically high occupancies and most independent operators are not far behind. It appears to be the comeback year for new development in many major markets around the country. With the potential for higher interest rates, as many pundits are predicting, the sales of existing facilities could increase as well, since sellers may finally be able to invest sales proceeds in other alternatives.
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.