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!
As we kick off 2016, the business of buying and selling self storage properties in the U.S. has never been more competitive or complex. We believe that the value of professional guidance from an Argus broker pays big dividends as buyers and sellers benefit from industry knowledge in today’s very fast-paced and dynamic market. Due to the robust performance of the self storage industry over the last several years, we are seeing more buyers than ever in the marketplace, and for the first time since the early 2000s, we are seeing meaningful development of new self storage projects around the country.
Sounds like good news – and it is! Never before have prices been higher for self-storage properties – either in absolute dollars or in relation to the income they produce. Over the last 3 years or so, selling prices of self-storage have risen dramatically. A typical owner could look at their facility and find that their value (without any increase in rents or occupancy) went up by about 27%; even more if your operating results improved.
As self-storage brokers we spend a lot of time talking about cap rates, interest rates, market fundamentals, new development and the overall investment market. These indicators are suggesting that we may be reaching a time in the real estate cycle that allows self-storage owners to reposition their assets for long-term prosperity and continued growth. This process involves “weeding” your portfolio to sell some of the assets that are less attractive and less profitable to your operations.
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.
For the last several months we have been talking about the uncertainty in the self-storage investment market, due to stock market volatility, looming interest rate hikes, a new development pipeline, and the ever-changing financing market. By most measures the self-storage rental business is reasonably steady, if not booming today. However, over the last several years the self-storage industry has been able to grow and prosper because of its ability to continue to find “bolt on” revenue streams.
There are widespread expectations that the Federal Reserve will raise rates later this year; in fact, many think it’s going to occur next month. So exactly how will this increase in rates affect commercial real estate? The better question is why are interest rates rising?
Over the last 10 years, I have realized that complacency is a major problem in self-storage, particularly as we all have enjoyed the recent strong performance of the industry. 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.
Today we find ourselves in a unique position in the self-storage industry. Capital appreciation, combined with strong fundamentals, increasing demand and STILL low interest rates have made the traditional transaction more accommodating so that both the buyer and seller can achieve their goals without hurting the other party’s position.
With all of the hype surrounding self storage today, new development buzz, strong market fundamentals, fluid financing options and all-time high values, it’s worth contemplating; is this as good as it gets? For the last several months we have been talking about how long this cycle will last and the uncertainty of the major driving factors such as interest rates, amount of new development and overall market fundamentals. For now, all signs are pointing to GO!
I have suggested over the last several months that now is a good time to buy, sell, develop or refinance. Sounds good all the way around, RIGHT? Today’s strong market fundamentals and very liquid lending market have made good deals even better, and the cash on cash returns are simply staggering for owners, buyers and sellers alike. We have all seen the comparison of self storage to other real estate sectors over the last few years and in short, the returns are higher and the various risks are more moderate with the one exception: overbuilding.