Here comes the self storage development train. After living through two booms and two busts in my real estate career, it has become clear that real estate peaks and troughs are very much accelerated by the development of new product which typically begins near the middle of the real estate cycle.
After three years of momentum building in the self-storage investment market, buyers and lenders will place what could be record amounts of capital in to self-storage properties by the end of 2014. Self-storage lending is fundamentally strong and lenders are continuing to maintain disciplined underwriting standards all while creating liquidity and a fluid transaction market. At the same time, overall market fundamentals are remaining strong with demand surging and supply of new product still slow in coming. The question on many investors’ minds is “how long will this last?”
When contemplating a purchase, most of the risk in a Buyer’s eyes can be summed up in the following question. “Will this property continue to perform as the Seller has described?” Most investors agree that operational history is the most reliable indicator of future performance, so how can you demonstrate this history to prospective buyers and make your investment seem like a less risky investment?
Over the last 6-12 months, the phone at Argus has been ringing off the hook with owners wanting to find out what their property is worth. In some cases, their interest is only curiosity, but in many cases they are interested in financing, real estate taxes, estate valuation or selling. Most are looking for a “ballpark” number for planning purposes and have asked Argus to develop a value range so that they can make informed decisions about their investments.
You didn’t have to raise your rents, lower any expenses or even increase your occupancy and you made A LOT of money over the last few years. In fact, it may have been so easy that you didn’t even realize it! So, what happened?!
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.