Cautious Optimism Reigns in the Self-Storage Real Estate Market
Copyright 2014 by Virgo Publishing.
By: Ben Vestal
Posted on: 01/10/2012



 

The last few months of 2011 were markedly different than the first six months of the year, especially for the real estate business and self-storage properties. Liquidity in the real estate debt market slowed in the third and fourth quarters, led by the commercial mortgage-backed securities market mid-year. In general, bankers lived up to their “scrooge” reputation by dragging their feet on making new loans.

Cautious optimism is certainly present in today’s market, albeit mostly from facility owners who have seen their rental activity and occupancy uptick over the last 12 to 18 months. Self-storage values have rebounded from the bottom in 2009, but have also fallen off ever so slightly over the last three to six months.
Let’s remember the “real estate market” plays a bigger role in determining your facility’s value than the operation of your property. Now’s the time for self-storage owners and investors to take a look at how the market is behaving as a whole, understand what pressures are present in the market, and position their investments to meet their objectives.

Competitive Pricing

The availability of self-storage properties appears to still be due primarily to owner life events, with few self-storage owners deciding to sell in order to capitalize on the improved market, current U.S. capital-gains tax structure and the loosening of the debt markets.

The Moody’s/REAL Commercial Property Price Index (CPPI) measured a 1.4 percent decrease in September after four consecutive months of price increases, and the index remains near its two-year average price level. The latest update to the CPPI was published in November 2011 and was computed through September 2011, so one can assume a 30- to 60-day lag in data provided by the accompanying chart.

Moody's/REAL Commercial Property Price Index (CPPI)***
Source: www.rcanalytics.com/derivatives_index.aspx

While we continue to see robust transaction volume for larger self-storage properties and portfolios, it’s possible these large transactions may pause in 2012 as pricing has become very competitive, making it difficult for institutional investors to meet their internal yield requirements. This will assist in increasing the transaction volume for quality “one-off” self-storage properties in good first- and second-tier markets, especially with interest rates staying low through the end of 2012, as buyers will be looking for increased yield.

A Reason for Optimism

With the looming presidential election this year, we will soon learn how the candidates are proposing to keep our economy on track. The power struggle and lack of decision-making by our government will lead to a temporarily prosperous time for buyers and sellers alike. It will allow buyers to continue to capitalize on low interest rates, while sellers will be able to capitalize on the current capital-gains tax structure along with a variety of other opportunistic political policies.

We must all remember, though, that one stroke of the pen can change everything. This, along with the unsettling vibes we’re getting from several industrialized countries in Europe and Asia, should concern us all, as the potential effects on the U.S. investment climate are severe.

Self-storage has outperformed almost all other real estate asset classes over the last three years, and when there are high returns, there are always new investors looking for yield. With real estate investor sentiment remaining strong, we’ve found, ironically, that the uncertainty in the market may actually be increasing the demand for real estate investments.

Wall Street gave investors a wild ride in the second half of 2011, and most investors are finding real estate provides favorable returns relative to other investment classes. When you have a business (self-storage) that performs this well in a very difficult economic market, there’s good reason for some optimism in spite of the turbulent market. However, keep up the hard work as the ability to keep your current tenants and attract new ones is what has made the self-storage industry the shining star in the real estate business.

Ben Vestal 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; e-mail bvestal@argus-realestate.com.