After three years of momentum building in the self-storage investment market, buyers and lenders will place what could be record amounts of capital into self-storage properties by the end of the year. Industry lending is fundamentally strong, and lenders continue to maintain disciplined underwriting standards, all while creating liquidity and a fluid transaction market.
At the same time, overall market fundamentals are still strong, with demand surging and supply of new product slow in coming. The question on many investors’ minds is, “How long will this last?” History tells us these market cycles always go further and last longer than anyone thinks.
Every self-storage owner must consider his individual and company objectives to capitalize on the current market conditions and protect the fruits of his labor. Below is an outline of the various options available to owners today and what they can do to maximize their investment.
Option 1: Batten Down the Hatches
You want to hold onto your property for the long haul. The questions you must consider are:
- Are you willing to hold your property for five to 10 years?
- Do you have solid financing in place for the contractual period of at least five to seven years?
- Do you have liquid resources to cover the debt service in the event your revenue declines 25 percent?
- Is your facility one of the five most competitive storage properties in a 3- to 5-mile radius?
- Is the local municipality reluctant to approve new self-storage projects?
If you can’t answer “yes” to these questions, you’ll have a serious problem reaching your objective of holding the property. As we all learned between 2008 and 2011, the availability of real estate loans can become scarce for long periods and terms can drastically change from one year to the next.
If you have or are considering a commercial mortgage-backed securities or life-insurance loan with no personal recourse, you must understand the following: how the prepayments work (defeasance or yield maintenance), what cash management is and, in the event of a deed in lieu of foreclosure, what are the tax implications of “debt forgiveness.”
It’s clear the value of self-storage properties can fluctuate drastically in a five- to 10-year period—as much as 40 percent. You can only imagine the effect a 40-percent value reduction would have on a property that’s seeking financing. If you’re not comfortable with your answer to any of the above questions, try Option 2.
Option 2: Time to Move On
If you’re thinking of retiring or lowering your risk, you’re concerned about your market, or you just want to take it easy and simplify your life, maybe you should consider selling. The questions to answer are:
- Are you willing to sell at the market price?
- Do you want to avoid waiting several more years for the next “peak” in values?
- Do you believe prices are within 10 percent to 20 percent of the all-time highs?
- Do you understand capitalization rates?
- Are you willing to pay the taxes?
Once again, if your answer is “yes,” think about selling. There are many serious buyers in the market, almost always knowledgeable about self-storage and, for the foreseeable future, willing to pay very aggressive prices for well-run and -located properties. The net result is if you decide to explore selling in today’s market, you should expect a very aggressive valuation of your property and will most likely be able to choose from multiple buyers. If you’re not comfortable with your answers to Option 2, you may want to think about Option 3 or return to Option 1.
Option 3: Denial
Denial, by simple default or negligence, is often a popular choice when owners are presented with several options that seem to make financial sense. By any standards, the first two options are more difficult, and denial is easier—for now! However, they give you some ability to protect the fruits of your labor.
As history has proven, the one thing that remains constant is investments change, and the value of an investment has more to do with the market than its overall performance. Thoughtful action is always more productive than worrying about doing nothing.
With new self-storage construction picking up and the threat of rising interest rates, now’s the time to act. Self-storage owners should take a hard look at their long-term goals and consider which steps should be taken to protect their investment.
Ben Vestal is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self-storage buyers and sellers and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE; e-mail [email protected]; visit www.argus-selfstorage.com.
