Our roundtable of experts gathered this month to discuss the Northeast United States. These are interesting times, and Ive asked our local brokers straightforward questions about their regions that are pertinent to every self-storage ownerand potential buyers. Joining the survey are: Linda Cinelli, LC Realty, North Branch, N.J.; Joe Mendola, NAI Norwood Group, Bedford, N.H.; Chuck Shields, Beacon Commercial Real Estate, Conshohocken, Pa.; and Guy Blake, Upstate Commercial Group, Kingston, N.Y. My comments are in italics.
What are buyers and sellers views on valuing and pricing self storage properties, and are they consistent with the market?
Cinelli: In my market in northern New Jersey, some sellers still have a misconception about value vs. pricing. Many sellers think that theyre the only game in town and that buyers are desperate to buy anything, but in reality, there are enough properties on the market that buyers have a choice. Occupancies are not where they were a year ago and factors like the recent sales tax have impacted storage businesses throughout the state. This means market prices for facilities are often lower than what sellers perceive as the actual value of their property.
Shields: Although buyers are still anxious to acquire self-storage, they appear to be more cautious in their efforts. The slowdown of the economy and interest rates, especially in housing, indicates things are changing. This results in a discriminating buyer when it comes to valuing properties. Likewise, sellers are aware of cap rates and that values are leveling off. More sellers are starting to inquire as to what their properties might be worth if they were to put them on the market.
Mendola: Sellers still want cap rates that reflect values prior to the Federal Reserve raising interest rates. In contrast, buyers not only want a value consistent with these higher interest rates, they want a discount for the possibility of oversupply in certain markets. Buyers are intensely concerned about absorption rates and marketing costs in a highly competitive self-storage market.
Blake: Most people already in the business know the game pretty well. For stabilized facilities, sellers tend to price slightly above market and, not surprisingly, buyers want to buy slightly below. The tricky part is pricing facilities with high vacancy. Sellers want to price it based on potential income, and buyers based on actual. Those deals are tougher to get together because each side has a very different view of the propertys value.
Thanks to low-interest rates, sellers have ruled the roost for a couple of years and theyve come to think of it as their right. But while interest rates and cap rates are still low and thus prices are still at all-time highs, greed among sellers seems to run at a pace lapping many serious buyers desire. There are still buyers for good properties; many facilities have been sold over the last three years, thinning the ranks of buyers and dampening demand. My experience watching 35 years of real estate cycles tells me some potential sellers will be left without a chair when the music stops. In the end, buyers set the price in the market; sellers only propose!
What are the ranges of cap rates on self-storage properties in your market?
Mendola: The cap rates in New England range from the low 8 percent range for premier properties with high barriers to entry, to between 9 percent and 10 percent for average market facilities, and 10.5 percent and higher for those in the more rural areas with plenty of land for development.
Cinelli: For properties built within the last five years, cap rates are in the range of 7 percent to 7.75 percent. This is for projects that are relatively new, in good condition and typically offering more amenities. Older facilities with fewer bells and whistles tend toward cap rates closer to 8 percent-plus.
Blake: Cap rates in Upstate New York and eastern Connecticut seem to be increasing slightly. At the low end of the spectrum, Class A facilities with excellent amenities are seeing rates around 8 percent while the high end seems to be around 10 percent to 11 percent for older or poorly maintained properties.
Shields: Im seeing cap rates in the 8 percent to 9.5 percent range in eastern Pennsylvania and southern New Jersey with an occasional cap rate in the 7 percents. The majority of properties on the market or recently sold are well-kept, in good locations with decent-to-good occupancies. I would consider them to be Class B properties.
What kind of financing is available for buyers in your market?
Shields: Since there has been access to inexpensive acquisition capital, many investors can have their pick as to who finances their project. Banks are still aggressive even though rates have inched up over the last year. But many investors are looking to conduits for better rates with up to 30-year amortizations. In some cases they are 120 to 160 basis points over 10-year Treasuries, which are very low at this time, making conduit lenders attractive.
Cinelli: Most of the buyers I am working with generally have their own relationship as far as financing. I havent seen many problems with banks not wanting to do self-storage deals. Depending on the strength of the borrower, rates are in the 5.5 percent to 6.5 percent range.
Mendola: Financing sources run the gamut, similar to everywhere else in the country. Local banks lend on the small- to medium-sized properties and the conduit lenders are very competitive with the larger properties.
What are buyers in your area concerned with most when purchasing a storage property?
Shields: All buyers arent alike. Price is always an issue, but not necessarily the biggest concern. Financing these days isnt a concern. Expansion ability is important, as investors want to add value that increases revenues. I believe the one factor that stands out in a buyers mind is location. Everything relates to location. Location tells the buyer if there is room or a need for development in the area. But most important, location tells the buyer where his competition is. My experience is that competition is the most influential factor for a buyer and how he views a self-storage property.
Blake: The two major concerns I hear about are price and expansion ability. There needs to be an upside to the property, either in rental rates or expansion land so the buyer knows they have room to grow the income over time.
Mendola: Our buyers are mostly concerned with absorption of spacer rates, the cost of marketing to maintain high-occupancy levels and the rate of population change in the area. This shows theyre looking well into the future to determine if a project will provide sustainable and increasing income for years to come.
Cinelli: The pricing of the property is always key, but buyers are also looking at the occupancy of the facility, the expansion potential and the amount of competition in the area. If the facility can realistically reach financial projections, pricing becomes less of an issue, especially if there is significant upside in the deal.
Has overbuilding been a problem in your area over the past year and do you expect it to be troublesome in the future?
Mendola: The New England market is best characterized as being in equilibrium, meaning there is an adequate supply of storage for the market. If developers continue to build more storage in markets where demand is met, there will be an oversupply. From my perspective, few markets in the Northeast still need storage.
Cinelli: I have seen overbuilding in some markets in New Jersey and New York, but overall these areas still have growth potential. With new housing developments and urban renewal projects creating new demand for storage, youll see many areas with two or three facilities within a block of each other. Time will tell if theyll be able to compete, but for now it seems that self-storage remains one of the best investments in real estate.
Blake: I havent seen significant overbuilding in Upstate New York. Most of the people I talk to are well-aware of the dangers, and I even know a couple of operators who decided not to build out sites that had full approval.
Shields: Luckily, overbuilding hasnt been a concern in my area. My experience has been areas that are seeing development are in need of self-storage. In the past year or so, a number of facilities started in northeastern Pennsylvania. This is a region experiencing a great deal of growth, especially from New York and New Jersey. I expect continued development in this area, per need.
Michael L. McCune is president of the Argus Self Storage Sales Network, a self-storage real estate brokerage and development company based in Denver. Argus also operates www.selfstorage.com, a marketing medium for owners in the self-storage industry. For more information, call 800.55.STORE; visit www.selfstorage.com.