At the Inside Self-Storage Expo in Las Vegas, Feb. 13-15, we saw a lot of interest in the industry because of the instability of the stock market and people's desire for the steady cash flow self-storage offers. For this month's roundup, we focus on self-storage as an investment vs. other types of real estate. I surveyed our Midwest brokers for their insights: Bruce Bahrmasel, The Preferred Realty Group, Lincolnwood, Ill.; Arnold Erickson, Commercial Realty Services, Des Moines, Iowa; Larry Goldman, Prudential Commercial Resources Realty, Kansas City, Mo.; Mark Helm, RE/MAX 100, Louisville, Ky.; and Peter Hitler, Investment Real Estate Specialists, Mequon, Wis.

1. Is it a good time to sell self-storage? Please elaborate.

Bahrmasel: This is an outstanding time to sell self-storage. There is not a lot of product in the Chicago market.

Erickson: Yes, interest rates are very low and, in this area, the occupancy and income are very high.

Goldman: If the seller is considering selling within the next few years, time may not be on his side. Lender underwriting is getting more and more difficult. In some markets, overbuilding is hurting occupancy and rental rates.

Helm: Yes, it's a great time to sell self-storage, nationally as well as here in Kentucky and southern Indiana.

2. Is it a good time to buy self-storage?

Bahrmasel: It is a great time to buy. Despite the dearth of product, interest rates remain low and self-storage remains attractive.

Goldman: Yes. Interest rates are low, which helps buyers and sellers achieve their investment objectives. After the rollercoaster ride the equity markets have been through, the steady, diversified cash flow from self-storage is looking better than ever. The buyer has to be select in choosing the right market, as overbuilding exists in some areas.

Erickson: Yes. Interest rates are low and there is still a great deal of potential in this area for further growth of the business.

Helm: Yes. There is great investment potential and low interest rates.

3. Do you believe other types of real estate are underperforming and attracting buyers to self-storage?

Bahrmasel: Yes. While cap rates in other real estate investment types are as low as 7 percent to 8 percent, self-storage cap rates are usually above 10 percent, making it very attractive.

Erickson: Probably. I think the office market is slow and retail is flat.

Goldman: Yes. The diversified income provides more stability than single- and some multitenant properties. With the Enron debacle, even investment-grade, triple-net, "coupon cutter" properties are not looking as attractive to buyers and lenders as they once did.

Helm: Other real estate is underperforming, but I don't necessarily believe it is leading to a jump to storage--at least not here. Storage is selling fine without any help from outside factors.

Hitler: I think the performance of the stock market is having an effect, bringing buyers to self-storage. Other real estate owners are sitting on their investments.

4. We've heard replacement costs are putting a cap on values. What has been your experience?

Bahrmasel: I've had some deals that have not appraised out to their sales prices primarily due to replacement costs. But banks and customers are downplaying that aspect due to good performing cap rates in these projects.

Erickson: I don't know. I can see where this would be a factor, considering all of the soft costs and hard costs for a new facility, including the rent-up time frame.

Goldman: It is almost all about track record and net operating income.

Helm: I have no experience in this. It isn't an issue in my area.

5. Are you or your buyers having any difficulty getting loans for your self-storage sales and projects?

Bahrmasel: I have had a few problems, but this was more due to the banks' lack of understanding of the nature of the business and the underwriting of self-storage projects. Increasingly, self-storage has been looked upon more favorably by local and regional banks and large lenders.

Erickson: I have not tested this recently.

Goldman: Debt-coverage ratios and loan-to-value ratios are getting increasingly more conservative.

Helm: Loans have tightened up. Loan criteria has tightened up. Lenders in this area are definitely looking closer at a borrowers' criteria before they lend.

Hitler: No. If you have a relationship with a local banker, you should be OK.

6. Having marketed self-storage properties for sale, what do you see as being the most important factor to successfully selling a property?

Bahramsel: The most important factors are room for expansion at a facility and ability to increase income. Ability to expand is very important for potential buyers.

Erickson: I see the most important factors as proper pricing and marketing exposure.

Goldman: Maintaining adequate records of operating history is a major challenge--most buyers and lenders like three year's past performance on older facilities. The ability to expand and critical mass are very important and create significant value.

Helm: Getting realistic operating expenses from sellers. Sellers are operating on a shoestring and new buyers won't operate them that way.

Hitler: A seller must realize his present income is what a buyer will use to calculate his purchase price. Future pro forma income is interesting, but the important information is what the facility is doing today and what rents customers are willing to pay. Sellers should realize that for every dollar they increase their bottom line, the selling price will increase by a factor of 10. Sellers should raise their rents as high as possible and then price the facility on what the business is doing today.

Michael L. McCune has been actively involved in commerical real estate throughout the United States for more than 20 years. Since 1984, he has been owner and president of Argus Real Estate Inc., a real estate consulting, brokerage and development company based in Denver. In January 1994, he created the Argus Self Storage Real Estate Network, now the nation's largest network of independent commercial real estate brokers dedicated to the buying and selling of self-storage facilities. For more information, call 800.55.STORE or visit www.selfstorage.com.