Since the beginning of 2017 we have seen the self-storage investment market change at a very rapid pace, most notably a greater dispersion of investment dollars throughout the country focusing on secondary market transactions that can deliver a higher risk-adjusted yield to investors. The reason for the changing market is that many major markets are showing signs of slowing property values due to new supply hitting the market, rising real estate taxes and flat to rising capitalization rates. These market tipping points have left a gap between the buyers’ and sellers’ expectations in the marketplace today.
Here at Argus, we spend a lot of time thinking and talking about the value of self-storage properties. That has been our business for more than 23 years; extracting the value of a property in the process of a sale for a seller, as well as helping buyers to determine the right price to pay for a property. Our daily conversations are usually focused around interest rates, cap rates, new supply, time on market, loan to value ratio, basis points, NOI and a lot of other tropics that rarely interest an owner other than when they decide to buy or sell a property. Owners typically avoid terminology such as this is because most owners are busy running their storage business and are not likely to sell anytime soon. However, we believe that there is a connection between understanding the current market and nuances of what does and does not create value and running a successful business.
Everyone has an opinion. This statement has always been true, but in today’s ultra-connected, social media-oriented world, opinions are much easier to share (and harder to erase). Why is this important to self-storage operators? The image that you project online is one of the primary reasons that people will choose to rent from your facility. The opinions shared on review sites, social media and even your own online Yellow Pages listing can tell a story about your business…and you want it to be a positive one!
Benjamin Franklin once said that “a penny saved is a penny earned.” The same holds true in the real estate business, except that we can expect an even greater return when we make an effort to save on operating expenses. At one time or another, we have all looked at our to-do list and thought “I can do that next month.” Reviewing your operating expenses, however, is not one of those things you can afford to put off until next month.
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.