Speaking for most of us in the commercial real estate business, and probably most of us in the self-storage industry as well, I am very happy to put the year 2009 behind me and look forward to the promise of 2010. For me, 2010 will not be without its challenges, but a New Year offers the hope and optimism of a new beginning.
Indeed, our office has three self-storage facilities under contract and in due diligence. We have just completed our third Broker Opinion of Value report for a mortgage servicer, which should lead to a listing of the asset at a reduced value from the original loan value of the facility.
Listings of those kinds of facilities have been very slow coming to the market as the mortgage lenders of these types of assets have practiced a policy to-date of “amend, extend, and pretend” on loans in their portfolio that should have been sold or foreclosed by now.
Our office participated in such a loan sale recently of a portfolio of construction loans on 14 self-storage properties that were built within the last four years, but never made it to stabilization for any number of different reasons.
While I do not have a crystal ball to see into the future for what the New Year will bring, I shall make an attempt to summarize what some of the economists and financial prognosticians say about 2010 and then what my thoughts are:
Interest rates will go up. I don't see rates increasing until second half of 2010.
Capitalization rates will go up. Maybe for other asset classes, but I don't see them increasing for self-storage any further; but I do see underwriting (risk assessment) remaining conservative.
Transaction volume increasing. I do see the number of transactions increasing, but mostly the same type of properties coming to market as 2009:
- Troubled assets being sold via selling the notes, rather than the asset itself.
- Good, stabilized properties that must be sold because of partnership problems or because the owners of the assets need to liquidate and take their equity and save other assets that are non-performing, but salvageable.
- Small portfolios whereby the owner can still realize a gain by covering his loses with his winners or, to get liquid so that the owner can either take advantage of bargains out in the market or use the equity to fund a development deal that has been stalled because of the economy and credit markets.
Self-storage supply and demand issues. Until the economy—and the housing sector in particular—begin to recover and companies begin to hire workers or recall them to their plants, the supply of self-storage will continue to exceed demand along with discounting of rental rates. And this is despite the number of new construction starts dropping to a decade-low number in 2009 and continuing into 2010.
Inflation will begin to rise. Yes, this is probably true; but what better place to have your equity invested than in real estate if inflation does rise?
So much for the prognostications for 2010. We will continue to offer our advisory services as we have for these past 18 challenging months: meeting with clients to plan a strategy, advise them as to current market conditions, or be a reference for financing, marketing, management or construction services.
Nick Malagisi is the national director of self-storage and a senior advisor for Sperry Van Ness, specializing in the purchase and sale of self-storage properties. Since 1993, Nick has participated in the sale of more than 70 properties valued at $350 million.