Self-storage investors are enjoying the fluid nature of today’s transaction market, and it’s evident that property buyers and sellers need to focus on more than just price. We’re in an incredible period in which the unconventional and unexpected have become a part of everyday business. The influx and sheer number of buyers and equity to self-storage over the last few years has led to higher transaction velocity and facility values, and much to my surprise, has extended the investment cycle, with very little signs of slowing.
Industry brokers sometimes forget that day-to-day real estate transactions can be unfamiliar to clients. We deal with buyers and sellers every day, yet we sometimes forget to explain the nuances of this ever-changing market. With that in mind, I’d like to take you through a few of the less obvious aspects of today’s deals.
Structure
If you’re in the market to buy or sell a self-storage property, it’s important to understand that the structure of the deal can be as important as the price. With very sophisticated capital continuing to enter the market and values remaining high, alternative structures are becoming more common. I’ve advised clients on umbrella partnership real estate investment trusts (known as UPREITs), preferred equity structures and price allocations, just to name a few. These all allow the parties to achieve different goals and can be beneficial—if you understand them.
Too often the buyer and seller glaze over the structure without considering the financial implication of it. However, the devil is in the details. It’s important to remember that everyone’s situation is unique, so before you acquire or sell, seek tax and legal advice from an experienced deal lawyer and accountant.
Value
When brokers think about pricing, they’re focused on a number on which the buyer and seller can agree. Otherwise, there’s no transaction! However, today’s fluid market has made it difficult to pinpoint the exact value of a self-storage investment. Often, sellers are thinking about a price that would make them happy and not the one a buyer would actually pay.
In the real estate world, the market usually has a relatively narrow band of value. However, the range of self-storage facility values today is much wider. It’s not uncommon for offers to be 10 percent to 25 percent apart.
It’s important to remember that overpricing is not harmless! You must diligently and carefully analyze the value of a project today. Consider the traditional valuations techniques, such as market-sales comparisons, price per square foot, impact of new development, embedded value and the income approach.
In addition, you must also have a good feel for national investment sentiment and trends. We’re seeing more national and regional buyers expanding to secondary and tertiary markets, where there has been far less new development. This has driven up prices up in smaller markets while the valuations in major markets are flat or softening.
Bear in mind you shouldn’t be misled to believe your secondary market property is a 5 percent capitalization (cap) rate deal. We’re seeing secondary-market deals in the 6 percent to 8 percent range and major-market deals in the 5.5 percent to 7.5 percent range. These cap rates assume market-rate operating expenses for underwriting, such as payroll, offsite management, adverting, repairs and maintenance, etc. Secondary markets might not get the same respect as major ones, but it’s clear that in this cycle, this where the smart money is going.
Marketing
When taking a property to market, it’s vital to understand that the difference in quality and risk are often subjective. For example, a relatively low occupancy might indicate a poor performing property or, alternatively, a great opportunity to increase occupancy and revenue. For this reason, it’s extremely important to market properties expansively to find the buyer who has the most optimistic view of not only the asset but the investment market as a whole. Always beware the broker or colleague who says, “I have the right buyer for you. We don’t need to market the property.”
To maximize your value, you’re looking for the buyer who’s qualified and sees the opportunity to improve your facility. The more qualified prospects who are exposed to your offering, the better chance you have of maximizing your sales price.
When selling a self-storage property today, hire an investment broker who has experience and national reach to ensure you get the most from the transaction. When considering a sale, you would be well-served to focus on how your broker will structure the deal and market the property, and less on the price.
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 via an extensive marketing platform for self-storage properties. Property listings and informational resources can be found at www.argus-selfstorage.com. For more information, call 800.55.STORE; e-mail [email protected].
