Self-Storage in the Western States: Real Estate Snapshot
Copyright 2014 by Virgo Publishing.
By: Michael L. McCune
Posted on: 12/17/2008



 

The United States is experiencing a credit crunch unlike any other in recent history. Below, self-storage brokers throughout the West explore the potential impact on self-storage customers, developers, owners, buyers and sellers. Contributing to the discussion are the following real estate brokers, with my comments in italics:

  • Richard Arnold, Argus Northwest Real Estate, Portland, Ore.
  • Larry Hayes, Hayes & Associates, Missoula, Mont.
  • David Laney, RealStar Commercial Real Estate, Albuquerque, N.M.
  • Ryan Layton, American Real Estate Associates, Spokane, Wash.
  • Joan Lucas, Joan Lucas Real Estate Services, Denver

What changes in occupancies, discounts and rental rates have you seen in the last six months?

Arnold: I have seen no significant changes in occupancies in the last six months in Oregon. Rental rates remain firm, and customers have not yet had to make economic choices about keeping their storage units.

Hayes: Some owners in Montana and Idaho have reduced rates or introduced new move-in promotions to improve lease-up or maintain occupancy.

Laney: The New Mexico market continues to be strong for some owners in certain locations. As consumers have been hit with rising gas prices, rural Westerners are disproportionately affected and this is having an impact on rural storage owners who now have to compete over new customers and deal with delinquent renters. The urban markets of Albuquerque, Santa Fe and Las Cruces continue to have strong performance in stable markets. The areas of newer development are seeing more rent concessions and longer rent-up periods due to competition from equal quality facilities.

Layton: In Washington, certain partially filled facilities are getting creative to lease their vacant space. Good quality facilities should not have to discount rates, but when lower class facilities begin to offer concessions it often brings the rates down for the entire market.

Lucas: In recent discussions with Colorado owners, there is a wide range of opinions on the current state of self-storage demand. Well-located properties in higher income areas still enjoy high occupancies and offer few, if any, concessions to renters. However, in some secondary markets, residential foreclosures are still on the rise and owners are reporting slower lease-ups and an increase in vacancies.

It is also interesting that many properties with a bulk of 5-by-5s and 5-by-10s are enjoying much higher occupancies while the vacancies have increased in larger units. The Denver area is seeing a decline in the number of homes for sale, which will mean an improvement in the overall economy and hopefully an upturn for self-storage operators as well.

In general, given the economic slow down, what we hear from most areas of the country is that rates are holding up remarkably well. There appears to be more discounts given to secure the tenant and the rents have not had their usual increases. It remains to be seen how the remainder of the year plays out and the impact of the election on the economy as a whole. 

With banks cutting back on development loans, are you hearing about postponed new projects or good development sites staying on the market for long periods of time? Do you know of any projects in the planning phase?

Arnold: Bank financing is available to experienced developers who will put perhaps 25 percent of their own money into the project. Good sites can only be defined as “good” if they are priced right. If the seller wants $10 per square foot for a site that would be great for self-storage, it is not a “good” site. In the Oregon market, several new projects are in the planning stages in major areas.

Laney: The current changes in the money markets have impacted some developments as entitlements were secured in 2007, but the financing window has either closed or conditions have changed to meet new lender requirements. There have been some syndication requests for partnership formation and dissolution as these new developments have changed members.

Layton: Certain projects in my market have gone through entitlement, but the developer does not have the ability to perform on the entire project and therefore tries to sell a turnkey development. In strong markets, this is an easy sell, but in overbuilt or saturated markets the properties will often sit until the developer is forced to either build or foreclose. Many people are still looking to build, but may have difficulty finding the right site with the proper zoning.

Lucas: In recent weeks, I’ve spoken with several local lenders who are out of the market for at least 90 days. Several projects were on the drawing boards but owners couldn’t secure loans to begin construction. Several clients are also seeking a refinance on their facilities, but the terms being quoted today do not provide much flexibility.

It takes a stout heart to build a new facility and requires a lot of capital strength, but many experienced developers are continuing to build and really prime locations are being considered.

What is the general attitude of owners as they see cap rates increase and values go down? How are the recent economic changes affecting decisions to hold versus sell,or make capital improvements to make the properties more competitive?

Arnold: Most owners, if they are aware of cap rates increasing, are unconcerned. Once they are considering selling, they become concerned and will probably decide to hold on for a while. Some re making capital improvements to enhance their properties, but not all investors can afford to do that.

Hayes: Most of the older facilities have adequate equity and cash flow to ride out the short term. The newer leveraged facilities are experiencing difficulty in filling their facilities as quickly as intended, which is creating some tight times.

Laney: New Mexico storage owners are very locally sensitive and most have not changed their plans to sell their properties. Many have realized that a build-to-sell plan is a tougher situation now than it was a year ago. We have had very few owner defaults in the New Mexico market, which also mirrors the residential market foreclosure situation.

Lucas: In Colorado, we’ve had very few listings of higher quality projects in 2008. It is difficult for owners to realize that the values they saw in years past just aren’t supported by the market today. With a decline in values by as much as 7 to 10 percent over the last year, sellers are reluctant to leave that money on the table and are waiting for an upswing in the market again. Most owners are not making capital improvements at this time, but are waiting to see what happens with the market trends.

Layton: Most owners see today’s market as an opportunity to sell and get the last of the sub-8 percent cap rates before 2009 when capital gains taxes will increase. If the owner does not sell before 2009, he should take a hard look at the reasons for selling and possibly hold off until there is less uncertainty.

We currently have about as many self-storage properties listed for sale today as we had at the peak of the market. This indicates to us that for the most part the sellers continue to sell for personal reasons (retirement, moving, etc.) rather than fear of the market. Most sellers believe they still can make a handsome profit even though prices have declined somewhat, but they are meeting their personal goals by selling now. There are a few distressed sellers suffering from over-leveraging the properties or a slow lease-up of a new project.

Sellers are finding lenders now control both the pricing of a facility and the qualification of the buyers who need financing. How are your sellers reacting to this and what are they doing to make the property and deal more attractive? 

Arnold: Sellers may elect to bypass the lender and enter into a contract directly with the buyer. This will be at a reasonable interest rate for a period similar to what the lender might offer. It eliminates most of the details and expenses the buyer would have to endure if dealing with a lender, and may give the seller a break on his income taxes.

Hayes: In some cases, sellers are willing to carry a portion of the down payment.

Laney:New Mexico storage owners are very aware of the national lending liquidity and are adjusting asking prices through both sales concessions and offering carry backs from 5 to 10 percent of the negotiated sales price. In addition, the seller financing option, which is fairly popular in the West, allows the owner to realize a stronger position in the final sales price, deferred or incremental capital gains, speed to close and additional significant interest income that continues years after the close of escrow.

Layton: Some owners in Washington are adding security or ancillary items (boxes, packing supplies, etc.) while others are increasing rents so the gross income improves. Fresh paint and asphalt are good, quick aesthetic fixes to improve the attractiveness of the property. Sellers are offering rent guarantees and/or owner financing to help facilitate the deal.

Lucas: Some sellers have decided that carry-back financing, possible rent guarantees and/or a slight reduction in purchase price are all alternatives to get a deal done. Raising rental rates to gradually generate more cash flow is also a way to increase the attractiveness of the property. If sellers can keep rents up, be creative with their marketing and cut back on expenses, they will be able to weather this downturn in the real estate cycle.

It wasn’t so long ago that we had multiple buyers for almost every facility, but today the buyers demand attention to their needs and wants. This not the time to believe that a seller has much negotiating power, either in matters of price or terms. It’s imperative for a seller to set a reasonable price and terms for the property. Buyers will often not bid on overpriced properties; they can either wait or find a property that is more reasonably priced.

Michael L. McCune is president of the Argus Self Storage Sales Network, a self-storage real estate brokerage and development company based in Denver. Argus also operates www.selfstorage.com, a marketing medium for owners in the self-storage industry. For more information, call 800.55.STORE.