Argus is celebrating it 25th year in business this year, and in that time we have learned a great deal about what makes a successful transaction. An important part of that process is explaining what a real estate broker does and why we get paid to assist our clients in buying and selling self-storage properties. The value of professional advice during a self-storage transaction cannot be measured by wins and losses. In fact, often the most valuable advice does not even lead to a transaction. With the recent popularity of self-storage assets, we have seen many new non-storage brokers entering the space and offering their services to owners. It is important to understand that experience does matter and aligning yourself with a well-established self-storage broker will provide you with the best opportunity to maximize your investment.
Over the last several weeks, top executives from around the self-storage industry have gathered in New York City and Aspen to discuss industry trends, investor sentiment and the overall market outlook for 2019. The consensus was that industry executives remain cautiously optimistic about self-storage performance in 2019, in light of the interesting changes that we saw in the last few months of 2018. Much to my surprise, we saw the ten-year treasury decline to the mid 2.5%-2.8% range, self-storage development seems to be slowing or a least cooling off and we clearly have an abundance of capital still looking to invest in the space.
Meanwhile, the phone 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, estate valuation or selling. Argus is now offering a FREE 2018 sales comp report for each of your markets. Argus has tracked and inventoried more than 1,000 self-storage sales comps for 2018 and we were involved in more than 100 transactions nationwide in 2018, which puts us in a unique position to advise our clients. If you would like to receive this free report, please contact your local Argus broker.
The holidays are upon us and cautious optimism is certainly present in today’s self-storage investment market. Recent market volatility has pushed the Ten-Year Treasury back down below 3% and lenders, buyers, and owners are still bullish on self-storage assets. This, along with recent operating performance has breathed new life in to the already historically long self-storage run.
After exhibiting an incredible pace of growth over the last several years, the self-storage industry is showing signs of slowing to a more sustainable pace in 2019. Cap rates and values in most markets are expected to be flat and not compressing further, however we are also not anticipating any rise in cap rates as there is still meaningful demand and bidding competition from qualified investors. This late cycle expansion has continued to allow late movers to capitalize on a very fluid transaction and financing market. However, some sellers that hold out for the final dollar will be left wondering what happened when the investment market officially turns downward. Remember, it is better to be a year too early than a day too late!
In 2018, the biggest lesson we have learned is that not all markets and self-storage operators are created equal. We have seen new deliveries continue to push down rental rates on a national level, but revenue growth remains positive. New development continues to be highest in markets with strong employment growth which leads to outsized population growth. As I have traveled the country attending self-storage meetings and touring self-storage projects, I have noticed some common themes; overall everyone is happy, they have good jobs, the economy is growing, self-storage is still a desired asset class and for now life is good. Below I have noted four key positives and negatives that we have learned about the current self-storage market:
Much like the Colorado Rockies’ baseball season, which lasted longer than anyone thought, the era of record-low, long-term interest rates appears to be over with Prime, LIBOR and Treasury Rates at levels not seen in quite a few years. But where are rates headed from here? Is there enough factual evidence to warrant four more increases to the Fed Funds rate as currently anticipated? Let’s take a look at how we got here and all of the factors currently at play.
In 2008 when it was clear that we were in a recession, then Federal Reserve Chairman Ben Bernanke lowered the target Fed Funds Rate to 0% in an effort to stimulate the economy by encouraging borrowing by both consumers and businesses.
The economic environment of the last several years has been very favorable for self-storage values and operating performance. In fact, we have enjoyed the longest economic boom the self-storage industry has ever experienced. This has been spurred by strong operating performance, improving market fundamentals, better industry data, fluid debt markets, quality third party management platforms and a growing customer base. In short, when evaluating risk-adjusted returns and comparing self-storage with other commercial real estate investments, the returns are higher, and the various risks are more moderate, except for the risk of overbuilding.
We are just now starting to see some operating softness in select markets that over the last 12-28 months, have experienced a large number of new projects coming on line. This has led some buyers to shy away from these particular markets. Most of the new development has taken place in the top 25-50 MSAs and is largely concentrated in specific areas within these markets.
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, skateboards and baseball gloves for backpacks. It also appears that that the current run-up in self-storage values is coming to an end. Over the last 120 days we have seen interest rates uptick 25-50 basis points and there seems to be a bifurcation in pricing between “core” assets and everything else. While I would agree that many elements of the economy appear to be stable and growing, the confidence of entrepreneurial self-storage investors seems to be wavering with new supply hitting the market, overall lower occupancies and slower rental rate growth. As a result, many entrepreneurial investors are being more conservative when underwriting self-storage investments today. On the other hand, “core” assets are still demanding historically high values due to the lack of supply of core assets in the self-storage space. If you are like me, much of the current market signs don’t seem to fit into a neat package and this makes the remainder of 2018 difficult to predict.
In 2018 the business of buying and selling self-storage properties around the country has become much more complex than in years past, but the discussion with both buyers and sellers always ends up focusing on market cap rates. Unfortunately, most people don’t fully understand all the ramifications of this seemingly simple calculation. Hopefully this summary will help clarify this mysterious, yet fundamental, concept.
In this high-stakes game of real estate investment musical chairs, NOW is the time to find a chair before the music stops, bringing to an end high real estate prices and easy financing. Recently there have been subtle changes in the lending market that may actually be much more material than an initial glance might reveal. This is the time for serious analysis of your personal objectives and options because the real estate and credit markets are likely to change due to new supply, flattening of rental rate growth and overall pull back in aggressive underwriting.
When most self storage owners wake up in the morning, they don’t usually think about the Federal Reserve Open Market Committee (FOMC). Most owners are busy managing occupancy, controlling costs, and overseeing the operations of their self storage business. On a daily basis, these tasks are far more important than decisions made by Federal Reserve Chairman Jay Powell, and the rest of the FOMC. At the same time, the Fed Funds rate that is established by the FOMC has an enormous impact on the value of self storage facilities.
As investors are enjoying the fluid nature of today’s transaction market, it has become evident that buyers and sellers may need to focus on more than just purchase price. We are in an incredible period for the self-storage industry where the unconventional and unexpected have become a part of everyday business. The influx and sheer amount of buyers/equity in the self-storage space over the last few years has led to higher transaction velocity, higher values and, much to my surprise, has extended the self-storage investment cycle with very little signs of slowing down.
The value of professional advice during a self-storage transaction cannot simply be measured by wins and losses. In fact, often times the most valuable advice does not even lead to a transaction. Over the years I have written articles and analyzed just about every aspect of the self-storage business. However, we rarely explain what good real estate broker duties are and why we get paid to help our clients buy and sell self-storage properties.