Self-Storage in the North-Central States: Real Estate Snapshot 2009
|Copyright 2014 by Virgo Publishing.|
|By: Michael L. McCune|
|Posted on: 04/30/2009|
This month, I assembled a roundtable of real estate experts to discuss self-storage in the north-central states. I asked them to comment on their local markets and share their predictions for future performance. Joining us in this month’s discussion is:
1. The market has provided a unique dilemma for self-storage owners because cap rates are going up dramatically, which causes values to decrease and loan-to-value (LTV) ratios to increase. Are you seeing concern in your market about this problem, and how are owners solving it?
Bahrmasel: Self-storage owners in Illinois and Indiana are starting to understand the reality of the current market in which values can, and do, go down. One seller has significantly lowered his asking price and, as a result, a contract was generated from a buyer who had looked at the property several months earlier when it was priced about 12 percent higher. Another seller has agreed to carry a second mortgage to facilitate a transaction he never would have considered a year ago. A ready, willing and able buyer in this market is very tough to pass up.
Brehmer: Owners in Ohio are aware that cap rates are increasing in addition to LTV ratios. Some lament that they did not sell when the opportunity was there. I’ve been suggesting partial or total owner financing given the limited returns in alternative sources of investment. In the current economy, a seller could invest his proceeds with a bank or in a CD and earn a paltry but safe return, or he can provide the financing for the deal and earn a higher rate of return, which is secured by the borrower and the property.
Goldman: I’ve been involved in transactions where banks are replacing thinner, less experienced borrowers with more seasoned players, which leads to a consolidation of the industry. In some cases, while the banks do not control the properties, they are taking an active role in the negotiation of the sale. They tend to be win-win-win transactions: the sellers walk away whole; the lenders keep quality loans with stronger borrowers; and the buyers pick up great assets with terrific loans in an industry that is normally very difficult to buy into.
In other cases, sellers are more open to carrying paper than they have been in the past. Many buyers and lenders understand the storage industry is more desirable than retail and office properties in this economy.
Hitler: In Wisconsin, the vast majority of storage facilities are owner/operator-based, and most have been owned for 10 years or more by the current owner. Consequently, they are not saddled with the debt levels of many recent storage deals.
Having said this, we are seeing a couple of properties surface that were either refinanced or built within the last five years that are unable to make their debt payments and are soon to be in receivership. The workout will likely come from a third party with storage-management experience that can stabilize the property’s operation and enable it to be sold at a valuation close to the mortgage amount.
Johnson: Due to the short-term nature of self-storage rentals, lenders are being required to take a harder look at credits, usually requiring 25 percent to 35 percent of equity in transactions. Also, the regulation “mark to market” approach is causing appraised values to diminish by using higher cap rates. Owners are adjusting by being more realistic about the activity from potential buyers. Also, some owners may choose to escrow funds to guarantee a higher occupancy level and help a transaction close.
2. Many owners across the county have told us that their rates, occupancies and concessions are currently stable, but they are seeing delinquencies increase. What is the experience of owners in your area and how are they addressing delinquencies?
Bahrmasel: Owners in my market have reported increased concern over delinquencies. Some say they’re being more aggressive in their collections and voicing concern that renters who are more than 60 days past due don’t go beyond the point where an asset turns into a liability.
Brehmer: The owners I’ve spoken to in Northeast Ohio say delinquencies have only marginally increased. Moreover, they’re leasing units to foreclosed homeowners who are seeking storage for excess belongings as they move into smaller homes. This will tell whether these tenants will pay until the total rent eclipses the value of the stored items. Rents in these areas are also holding steady.
Goldman: Delinquencies are often a function of management. In Kansas and Missouri, we’re not seeing an increase in delinquencies across the board, only in certain situations where management does not stay on top of collections.
Hitler: I’ve spoken to several hundred self-storage owners this past quarter and been pleasantly surprised by their responses. Business is either good or very good, and the vast majority are seeing occupancies at or exceeding historic norms without corresponding increases in concessions. Only a small minority have seen their occupancy fall in the past six months. Delinquencies have ticked up for most owners, but only by a few percentage points.
Johnson: In the St. Louis area, we are seeing a small increase in delinquencies due to general economic conditions. Time will tell if this trend is more of a temporary effect or if the overall economic climate is changing.
3. In this very difficult market with many properties for sale, how do you help a facility achieve greater visibility and attract more buyers?
Bahrmasel: In addition to employing traditional marketing methods like newsletters, tradeshow participation and regular contact with buyers, the most important thing we can do in this market is make sure properties are priced correctly. Some sellers who set their prices based on old assumptions have seen their properties languish on the market. Others who are more in tune with current values or have reset pricing to reflect what is going on in the current market are receiving considerable attention, which may ultimately result in a transaction.
Goldman: Now is the time to explore new venues to get the word about self-storage to a newer profile of investors who are sick of the uncertainty of the stock market, retail centers, office buildings, etc. In addition to our traditional marketing, we’re expanding our programs to include alternatives such as Craig’s List and increasing our presence at state tradeshows.
Also, reaching out within the commercial real estate brokerage community is an effective way to increase interest in the self-storage asset class. In today’s market, non-storage brokers are more open to bringing their buyers to us, as the general velocity of investment real estate has slowed.
Hitler: There is currently a wide chasm between seller and buyer valuation expectations. Sellers still have 2007 values in their heads and have difficulty accepting that even though their business is generating the same revenue as 18 months ago, their properties’ value has fallen 10 percent or more because of macroeconomic conditions beyond their control.
Buyers, on the other hand, see what is happening in the residential market and believe these conditions must carry over to self-storage. To close this divide, sellers need to be more flexible, especially if the securing of bank financing continues to get more difficult for buyers. I foresee more deals using seller financing. Sellers also need to be prepared to throw in other terms that improve the value for buyers.
Johnson: Sales activity can be increased by targeting specific buyers, especially in small-town markets. In many cases, the right buyer for a property can be found in the same local area as they are the most familiar with that particular market. Local advertising in newspapers is a way to reach out to individuals who are not as familiar with the larger self-storage publications. Attendance at local and national tradeshows is another great way to increase the exposure of self-storage properties for sale to very targeted groups of potential investors.
Michael L. McCune 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 and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE.