Self-Storage in the Northeast 2010: Real Estate Snapshot
|Copyright 2014 by Virgo Publishing.|
|By: Michael L. McCune|
|Posted on: 01/31/2010|
I recently assembled a roundtable of real estate experts to discuss the state of self-storage in the Northeast. To help quantify the trends they’re seeing in today’s market, I asked them to rate their markets on a scale from one to five (rating specifics differ for each topic). I’ve also added my comments on their average response. Joining us in the discussion are:
How has self-storage revenue held up in your market over the past 12 months?
Cinelli: Three. In New York City and northern New Jersey, revenue hasn’t dropped drastically, but it has dropped. Owners are cleaning up their expenses, cutting costs and just hanging in there.
Mendola: One. I define dramatically as 7 percent to 10 percent from a high occupancy of about 87 percent on average. I can only think of one facility in my New England market that’s maintained its physical and economic occupancy with less than a 5 percent reduction. The resulting revenue for these facilities is down as well.
Shields: Four. My sense is the overall market may be slightly down and, in some cases, no change. Many owners will make allowances/discounts on their current rates to maintain occupancies with tenant retention as their primary goal, as well as securing new tenants. For these reasons revenue has declined.
Cinelli: Two. Inexperienced buyers won’t be able to get financing in this market unless they have real money in the deal. Buyers with a track record can get financing, but the deal has to make sense. We’re seeing capitalization rates around 8.5 percent for a class-A product and up to 11.5 percent for other products.
Mendola: Five. Community banks in New England are ready to lend up to about $2 million. The credit rating and outside income for the buyers have to be good, but the financing is available to those who meet the requirements.
Shields: Three. Almost all new developments and those with significant vacancies and build-out risks are not finding financing. Existing facilities with some stabilization are finding it more difficult to finance than in the past. Financing outlets (banks, lending institutions, etc.) are much more conservative in their lending requirements. They want stable incomes with a minimum of 12 months financial history, not pro forma. In addition, they’re requiring buyers to have more equity in the property than before.
Cinelli: Four. Most of the buyers we see today have serious interest in buying facilities, but their criteria for properties has gotten more strict. They are only looking for facilities with qualified financials that can be verified.
Mendola: Three. Buyers have the financial ability to invest, but their criteria for rating an investment is very strict.
Shields: Three. Recently I’ve seen more buyer inquires as to what’s available in the market. Cap rates have risen somewhat, and buyers seem to feel that conditions aren’t as scary as before. Optimism isn’t quite there yet, but buyers are serious enough to position themselves to react if the lenders ease up a bit. Buyers are also realizing that not all real estate, in this case self-storage, is being sold at a “fire sale.”
Cinelli: Two. Sellers in our market are not serious enough to make the right deal. Many are holding out for higher prices and don’t recognize that cap rates have gone up and values across the market have gone down. There are some situations in which sellers need to sell their properties because of pressure from the bank, but we’re not seeing many of those yet.
Mendola: Three. Sellers today are testing the market. Almost all of the sellers of properties I’ve listed are not over leveraged and have sufficient cash flow to pay their mortgages. As a result, they’re not willing to dilute their equity with a discounted sale price.
Shields: Three. It’s difficult for many sellers (any owners of real estate) to come to the realization that the present value of their property isn’t what it was from the historically high real estate market of a few years ago. If their facility could sell for a 7 percent cap rate at the height of the market, it’s now at a 9 percent cap rate. This is causing many sellers to question if they want to sell. Do they test the market or wait and see if it comes back up?