The self-storage real estate market is seeing resurgence in some areas of the country. To get answers to questions relevant to todays facility owners, buyers and sellers, I recently assembled a roundtable of real estate experts to discuss the state of self-storage in the Northeast United States. Ive asked them to comment on the state of the market in their regions and share their predictions on how the industry will perform in 2011. Joining us in the discussion are:
- Guy Blake, Pyramid Brokerage Co., Kingston, N.Y.
- Linda Cinelli, LC Realty, North Branch, N.J.
- Joe Mendola, NAI Norwood Group, Bedford, N.H.
As weve seen a dramatic swing in the volume of real estate transactions, from very few transactions in 2009 to a more normal transaction volume in 2010, what are the trends with cap rates and property values in your markets?
Blake: In Upstate New York, the short answer is cap rates are up and values are down, although certain segments of the industry have fared better than others. Weve been seeing a flight to quality across the investment real estate spectrum. Investors are seeking safety more than anything else, and have little appetite for risk.
Accordingly, well-located, class-A facilities with good occupancy rates are still in high demand and are selling in the 8 to 9 cap range. Class-B and -C facilities or facilities with vacancy issues have not fared so well. Demand for lower-quality assets is still off compared to a few years ago, and the sellers of these facilities should expect cap rates of 10 percent or higher based on actual, in-place income. Buyers are simply not paying for vacant space or expansion potential.
Cinelli: In our experience in New York City and New Jersey, there are no normal transactions in todays market. Property values have not increased. If anything, we hope to keep them stable. Cap rates have dropped 1.5 points, with aggressive rates at 7 percent to 7.5 percent, and most offers are around 8 percent to 8.5 percent.
Mendola: In the last 18 months, from east of Interstate 495 from Bourne, Mass., north to Concord, N.H., and over to the coast of Maine, there have been only two self-storage facilities that have closedone in Bridgton, Maine, and one in Derry, N.H. For a well-located facility with strong demographics, the cap rates are between 8 percent and 9 percent. In more rural markets with less density, the cap rates are between 9 percent and 10 percent. These properties have good occupancies in the 80 percent to 85 percent occupancy range.
Due to the lack of construction financing will conversions become more prominent in the next couple of years?
Blake: I dont think so. First, conversions generally require construction financing just like building new facilities from the ground up. Second, we have seen virtually no construction in the last two years, and I expect that to continue for at least the next two or three. As the recession wears on, Im seeing more facilities whose occupancies are slipping into dangerous territory. I dont expect to see any new construction, conversion or otherwise, until the existing facilities fill up their vacant space.
Cinelli: In my market, conversions are more prominent as theres virtually no money for ground-up deals, especially with the indicators for three to four years to stabilize. We are seeing conversion interest in certain urban markets with the population density and demand to support new facilities.
Mendola: Conversions fit into the same category as new construction in the Northeast. Theres plenty of capital to invest in well-located markets that can show good unmet demand for self-storage. The issue is speculative projects of any type are difficult to finance. But if a developer can demonstrate a strong track record in self-storage management and a need for storage, conversion or new construction can be financed with conservative underwriting terms. Now that the Small Business Administration has entered the self-storage financing market, it has opened up new opportunities for self-storage development through its 504 real estate program.
As the economy and real estate market start to recover, should investors buy, and should owners consider selling or continue to operate their properties and see what happens?
Blake: Its unquestionably a great time to buy! The tricky part is finding people who want to sell in this market. Its well known this is a buyers market, so many would-be sellers are just biding their time waiting for things to improve. Plus, were seeing a number owners of distressed facilities who would love to sell but cant because the value of their property is less than what they owe. This is going to take several more years for all this to shake out. The economic recovery in Upstate New York is progressing slowly. Were beginning to see activity pick up a little bit, but we still have a long way to go.
Cinelli: Depending on their particular situation, theres no clear direction for self-storage owners unless they are upside down in their loans. They take the chance if they wait for higher interest rates, larger players entering the market, and competing with rates. Today, we see more interest from owners looking for us to provide an opinion of value on their property, as most are looking to hold in the short term and plan for the future.
Mendola: As the economy recovers, Im encouraging buyers to move aggressively to own self-storage in this economy. This is because self-storage is not distressed property in New England. We dont have poor occupancies in the market and owners are not highly leveraged. So owners dont have to sell unless they want to change their lifestyle. In New England, the economy is not nearly as challenged as the nation as a whole. For example, in New Hampshire particularly, the unemployment rate is 5.7 percent and were having an influx of manufacturing businesses coming into the state.
What advice would you gives owners with regard to the financing market for self-storage properties in todays market?
Blake: Believe it or not, theres financing to be had in this marketprovided the property being financed is cash flowing! Lenders are being a bit more conservative than in prior years and they are looking hard at the borrowers, but most important is the cash flow of the property being financed. If you have a profitable facility, getting it financed is not going to be an issue. If youre reporting losses to the IRS, only a buyer with a strong signature will be able to get financing and it will probably only be in the 50 percent to 60 percent loan-to-value range.
Cinelli: If owners can refinance, they might want to see if they can bring down their interest rates if they have the equity. If refinancing is not an option, owners need to look for an exit strategy and plan how or when they can sell. At some point, there will likely be a change of circumstances that will cause them to sell, and its best to have a plan in place.
Mendola: Concerning advice for financing in New England, theres plenty of capital available from the local banks in the $2 million and less range with loan to values in the 70 percent to 75 percent range and interest rates in the 5.5 percent to 6.5 percent range. Theres also money to lend in the $5 million and up category with the life insurance companies and now some conduit lenders coming into the market. The area thats most challenged to finance is the $2 million to $5 million loan amount. There are not many lenders willing to lend in this price range.
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. For more information, call 800.55.STORE; e-mail [email protected] .