The Southeast

By Michael L. McCune

This month, I gathered real estate experts to discuss thestate of self-storage in the Southeast. Lets hear what they have to say abouttheir respective cities and regions. Our panel of brokers includes: BillBarnhill, Omega Properties, Mobile, Ala.; Dale Eisenman, Midcoast PropertiesInc., Hilton Head Island, S.C.; Kathleen OBrien, Wexford/OBrienAssociates, Arlington, Va.; Chuck Shields, Beacon Commercial Real Estate, Conshohocken,Pa.; and Frost Weaver, Weaver Realty Group Inc., Jacksonville, Fla. These areunique economic times, so I asked our brokers some straightforward questionsevery owner will find pertinent. I have also added my own comments andobservations.

1. While interest rates have remained relatively low, have younoticed more interest from investors new to self-storage? Who is actively buyingin your market?

Barnhill: We have had numerous contacts from new investorswanting to get into the self-storage business. There are a lot of real estateinvestors wanting to transfer their assets from other real estate types intoself-storage. The buyers in our market have been primarily regional ownerswith some larger storage companies who are looking for acquisitions.

Eisenman: The low interest rates have benefited buyers of alltypesthose new to the business and those actively involved. They havebenefited sellers by attracting more buyers who can pay reasonable values.Additionally, we are seeing local and out-of-state buyers consideringself-storage properties.

Shields: In general, my territory has seen new investorinterest. On average, I see one new investor call per week. The Delaware marketseems to be a little lighter; though most investors, new and old, are willing toconsider the majority of locations (most likely due to the lack of overallproduct).

OBrien: There has been consistent interest in my marketfrom investors new to selfstorage. The low interest rates have not changed that. I have seenexisting owners want to expand portfolios and add locations. However, there is still diligent attention to the basicseitherlocation, location, location for new facilities, or an analysis of theoperating history of an existing one. I have also seen an interest inunderperforming locations, those facilities that would benefit from morediligent and competent management, where an upturn in profit can be anticipated.

Weaver: We continue to have inquiries from investors new toself-storage, but have not seen a change in their level of interest because oflower rates. There is continued attraction, but this is based on more investorsbecoming aware of the benefit of self-storage ownership as compared to othertypes of properties. While there is growing attention from potential newinvestors, active buyers still tend to be those already in the business. They are more knowledgeable about the physical product and,more important, what it takes to improve the bottom line to increase the valueof an investment.

Generally speaking, historically low interest rates are makinggeniuses of buyers and sellers. These are unique times.

2. In other parts of the country, we are seeing buyers becomemore selective and price-conscious. What is the attitude in your area?

Barnhill: Buyers are indeed more selective in that they areseeking quality properties with good demographics.

Eisenman: All of the buyers I encounter want reasonable valuebut, for some, if their buying criteria are too conservative, no propertiesqualify. Not all buyers have the same objectives or goals. Some are looking for properties with well-established and stable net operatingincome and high occupancy. Others seek properties that may have a lower occupancy or NOI,thinking they can affect and improve them, thus providing an upside opportunity.

OBrien: These are always the basics: Location and historical performance are always important. Ithink self-storage investors have always been price-conscious, and this isreflected in the examination of the actualnot the pro formaoperatingstatements. The numbers are what they are.

Shields: To date, investors are telling me they are willing toconsider anything, anywhere, at any price, just so they can have the opportunityto be exposed to a property. After they get more details and have a chance to evaluate theproperty, they become more selective. I believe this show me everythingattitude is due to the lack of product in the market.

Weaver: Regarding buyers becoming more selective andprice-conscious, we dont see a change in Florida. There is such a scarcity ofproduct that decent properties are acquiring significant attention very quickly.We recently listed a property on a Friday, and I had a contract on the followingMonday.

Since most buyers are either current selfstorage owners orexperienced in other forms of real estate, they are sophisticated and know whatproperty values are within a very narrow range. There are not any greaterfools here, just rational buyers in a good market!

3. What are the most important things a seller should keep inmind when deciding to sell a property?

Barnhill: Most sellers should engage a knowledgeable brokerseasoned in selfstorage acquisitions. There are numerous aspects and caveats toconsider that an experienced broker would recognize.

Eisenman: A seller should recognize that, with the properrepresentation and marketing, a property will attract a buyer who will pay afair and reasonable price. He should keep in mind active buyers are successfulbusinesspeople and, often, self-storage owners. Accordingly, they aresophisticated buyers who understand the underlying concepts that drive values. The key is to present the property to a large universe ofpotential buyers to attract one or more who will make serious offers on terms andconditions acceptable to the seller. In preparation, the seller is well-advisedto provide his representative good records that demonstrate a net operatingincome to support the value he seeks.

Shields: This assumes the seller is actually a seller!It is the most important underlying factor, because unless a seller is committedto make the sale, he might not be receptive to the realities of the marketplace.These are some of the considerations to which a seller should be sensitive:

OBrien: I think the most important thing a seller shouldkeep in mind is the importance of good historical records.

Weaver: When considering selling, curb appeal through propermaintenance is important. However, the most significant issue is good andaccurate, historical, financial information. Most private investors dont keep very good records. In mostcases, they have personal expenses that have to be filtered out. This can be very time-consuming and create misinformation thatis hard to correct. We have taken a position that until we have good, accurateinformation, we wont proceed with listing or marketing a property, as itobviously impacts the value and sales price.

I think that the two most important things for a seller toknow are 1) selling is his objective and 2) having good records is imperative.

4. How would you describe your market in terms of benefitingbuyers, sellers or both?

Barnhill: There are many more prospects than there areproperties for sale. Since the Southeast has the best economic outlook in theUnited States, many buyers are looking to locate here. There is a great deal ofdemand in the Florida coastal areas.

Eisenman: This market is one in which buyers and sellers canbenefit from solid properties and low interest rates. I approach all potentialproperty sales as win-win situations. Both parties canand shouldbenefitfrom the transaction and the relationship.With capital gain rates at all time lows, coupled with lowinterest rates, buyers are able to secure good value with excellent financing;and sellers can enjoy converting a nonliquid asset to cash at historically lowtax rates.

OBrien: My market is a strong growth market. The five-yearprojected growth in one county is 35 percent. Obviously, this will create demandfor self-storage facilities. This, in turn, will benefit the seller and buyer.

Shields: This is a sellers market. The fact there islimited product in all classes enables sellers to ask very aggressive prices.Buyers, on the other hand, are able to buy these facilities because of thefavorable interest rates. Development in many areas is also strong, becauseseveral markets are not overbuilt, and there appears to be a need for moreunits.

Weaver: This is a good time for sellers, because there isstrong demand and lower interest rates provide attractive leverage. For buyers,Florida is a growing market that will generate considerable upside potentialover the long term.

5. In general, have you noticed a change in REIT activity inyour area? Which, if any, REITs are active in buying or selling self-storageproperties?

Barnhill: We have not recently noticed any change in REITactivity in our market. Reportedly, Sovran is interested in expanding inFlorida. Most of our work has been with regional and local buyers.

Eisenman: The REIT activity we see is Storage USA spinning offits secondary locations.

OBrien: REITS are very active in my immediate market inevery sector of commercial real estateoffice buildings, multifamilycommunities, industrial and self-storage. This is true of Baltimore, Md.,Richmond, Va., Washington, D.C., and other major urban areas. REIT interestdiminishes as the urban areas transition to a more rural landscape, where thepopulation density cannot support large facilities.

Shields: Some REITs are actively developing in selectiveareas, and others are thinning their portfolios in certain markets. In general,there has been little change with most of them. REITs have the capital andmanagement to continue developing in certain markets, and they will eliminatethose facilities that are less profitable.I have noticed All Seasons Storage and United Storall havebeen somewhat active in developing additional sites, whereas Storage USA hasmarketed a few of its sites for sale.

Weaver: We have not noticed a change in the activity of the REITs in our area; they have been here before and are still in the market.However, in some cases, they have become more aggressive for properties theyreally want. A property in south Florida that sold for a 9.5 percent cap lessthan two years ago recently sold to a REIT for a 7 percent-plus cap rate.

Nationally, the REITs have recently tended to develop more andbuy less. In some cases, they have been very active sellers of properties, butmostly for repositioning purposes.

Michael L. McCune has been actively involved in commercialreal estate throughout the United States for more than 20 years. Since 1984, hehas been owner and president of Argus Real Estate Inc., a real estateconsulting, brokerage and development company based in Denver. In 1994, hecreated the Argus Self Storage Real Estate Network, now the nations largestnetwork of independent commercial real estate brokers dedicated to buying andselling self-storage facilities. For more information, call 800.55.STORE orvisit www.selfstorage.com.