Forecasting economic trends, particularly in real estate, is risky business. However, not paying attention to economic trends such as interest rates, cap rates and overall real estate investor confidence is even riskier. I believe that self storage owners have made or lost more money because they are in the real estate business not the self storage business; even though your self storage business is an extremely reliable income stream.
While the last few years have been very difficult for the self-storage industry, the most positive and productive result of the contracting economy and challenging real estate market was that self-storage operators had to take a very hard look at their operating expenses. This has forced many operators to change their marketing campaigns and go outside their comfort zones to move into the next generation of self-storage marketing.
During the relatively brief history of the self-storage business (35 to 40 years) the perception about the industry has changed dramatically. Wall Street has now embraced the industry and life insurance companies and conduit lenders have come back to the market, enamored once again with lending on self-storage properties with terms similar to core asset classes such as office, retail and industrial. Along with the respect that the self-storage industry has earned over the years comes an increase in competition. Operators are now realizing that sophisticated operations and economies of scale are imperative to survival in the business.
There are many ways to enhance your self-storage facility’s Net Operating Income (NOI) including raising prices or lowering expenses by using cheaper service providers. With the recent introduction of reality TV shows like Storage Wars, self-storage operators are rediscovering a tool to improve their NOI by recapturing lost revenue from non-paying tenants.
As we settle in to 2011, it is clear that self-storage values are rebounding along with the values of all other commercial real estate. In 2010, large MSAs like New York, Boston, Los Angeles, Chicago, San Francisco, Houston, and Washington saw the beginning of a rapid recovery in commercial real estate values, much to my surprise. A combination of big portfolio sales and solid returns during the downturn has led both small and large investors back to self-storage as a preferred investment.
Since the onset of the recession in 2008, millions of Americans have had to adjust to lower personal incomes, family members losing jobs, decreased asset valuations and shrinking investment portfolios. Simultaneously, commercial real estate values have plummeted by as much as 40 percent from their 2007 benchmark highs. With such financial difficulties, many people have simply tried to hang on until better days. We think those better days may be coming in 2011 given recent encouraging signs of economic improvement: