The last few months of 2016 saw some interesting changes. We had a historic presidential election, the ten year treasury moved up in a meaningful way, and Self-Storage REIT stock prices sagged for the first time in quite a while. Meanwhile, 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.
The holidays are upon us and cautious optimism is certainly present in today’s real estate market, including self-storage. The recent presidential election along with the softening of the self-storage REITs operating data has momentarily caused the market to pause as many investors and financial institutions, both big and small, are pulling in the reins and exercising discipline. The ten year treasury has been gradually moving up from a low of 1.37% in July to over 2.4% in early December, with the largest jump coming just weeks after the presidential election.
This time of year, we find ourselves reflecting on the things that we are grateful for and the people who mean the most to us. Here at Argus, we are most thankful for the men and women who work hard every day to serve the needs of their self storage clients. The Argus Self Storage Sales Network is made up of over 50 self storage professionals around the country who are helping their clients navigate the buying and selling process. We feel it is time for Argus to recognize and congratulate the Argus Affiliates and their respective teams around the country.
Over the last 12 months we have seen the formation of a new self-storage REIT (National Storage Affiliates) and the other four self-storage REITS (Public Storage, Cube Smart, Life Storage and Extra Space) have all hit all time high valuations. Like many of you I have been watching the stock market closely in recent weeks and it is clear that Wall Street has started to take caution with regards to self-storage investments.
Change and uncertainty go hand in hand, whether it is the looming Presidential election or the impact that a new administration will have on the stability of the economy. As we approach election season, many are adopting a “wait and see” policy when it comes to evaluating the market for self-storage investments. We know that the three biggest risks to your self-storage value and the overall industry are interest rates, cap rates and overbuilding.
The recent influx of buyers to the self-storage space has led to higher transaction velocity and some self-storage owners who are unfamiliar with the transaction process may have questions about the procedure and the strategies that will help them achieve maximum value. With this in mind, I thought I would take you through some of the less obvious parts of a real estate transaction and explain not only the activity but also the associated strategy. We will also touch on some deal structures that may help you achieve your goals as a buyer or seller.
With capital flow of both equity and debt having dramatically increased over the past few years, self-storage has become the golden child of niche real estate these days. Delivering higher returns and a more stable cash flow than other investments, self-storage is well positioned for the time being. A wise real estate investor once told me that “you are NOT in the self-storage business – you are in the real estate business.” Even though your self-storage business has an extremely reliable income stream, the real estate market has more to do with the value of your self-storage property then the operations of your self-storage business. With that being said, the question I have recently been asked is how can owners protect their value?
The good news is your competitor sold for a record high price; the bad news is that you have to pay for it in higher real estate taxes and new competition. These two factors facing most self-storage owners today will likely reduce the value of your self-storage project as owners are faced with the after-shock of an increased property assessment and increased competition that always follows record high values.
by Tom de Jong
Today’s marketplace consists of many times more Buyers than Sellers for self-storage properties. These buyers vary widely and include institutional buyers (primarily public and private REIT’s and large operators), high net-worth buyers, exchange buyers (trading from another real estate sale) and other new entrants into the marketplace. This excess of Buyers has driven prices to record levels and today’s prices typically include some level of “proforma” adjustments to occupancy levels, income and expenses.
In today’s highly competitive self-storage marketplace, companies that continuously cultivate the next generation of leadership enjoy a business advantage. Every company needs a good succession plan, it is critical to ensure the protection of the company’s future for the investors, employees, and with regard to partnerships and family owned firms, for its successor-owners, too.
The mortgage banking community recently gathered in Orlando to discuss the state of the commercial real estate industry. This is the largest annual gathering of commercial lenders and mortgage bankers and the tone this year was upbeat yet cautious. While lender allocations are generally higher for 2016, the mortgage-backed securities market faces some significant headwinds.
What a great time for the self-storage industry. We have experienced a record number of transactions over the last several years and each year we seem to be breaking records with regards to low cap rates, rental rate growth, NOI growth, per square foot prices and actual value for every dollar of net operating income. Many are calling it a generational high in values!