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!
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.