By Mike McCune
Great markets are wonderful, but we all know they will eventually end. What does that mean, in general, for self-storage owners?
First of all, it doesn't mean you should panic. After spending 27 years in the commercial real-estate business, I think I can safely say that self-storage remains one of the very best long-term real estate values. The relationship between the yields, level of investment and the relative risks makes self-storage a stellar real-estate investment. If you are holding a well-located self-storage facility for a long-term investment, I could not recommend selling the property, even though I might feel that we may be near the top of a real-estate cycle. Not only can't we find a better investment, it is difficult to overcome the tax impact of a profitable sale.
However, with all of that said, there are reasons to sell that are independent of the long-term investment virtues of self-storage. Some of those reasons may be retirement, estate planning, changes in your local market that could negatively and permanently impact your property, or possibly partnership objectives. In the event that you are considering a sale for one of these or other reasons, this may be the best time in the market cycle to attempt to achieve the best price on your self-storage property.
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One of the best, but most often ignored rules in real estate is to sell when the news is good, not when the first bad news appears. As we have all seen in the Wall Street Journal and other publications, today's economic news is a politician's dream come true. Take our little test (see News O' Meter), and determine if you think the news is going to get much better over the next year (circle the appropriate numbers, and then add them up). While our list may not be entirely comprehensive, I think we have covered the large issues that will affect the real-estate market in the next year.
If you scored a negative number, and you are thinking about selling, it might be a good time to get ahead of the curve. There are some things that may impact the self-storage market more than they will the general market. For example, with Congress talking about capital-gains tax reduction, there will be many self-storage owners wanting to sell. The good news is that they may save some taxes, but they may also put a lot of property on the market just as the cycle turns. A little analysis would suggest that being the first to sell is going to be better than being the last to sell.
As we all know, self-storage is not the investment secret that it once was. This great investment has attracted not only new builders, but the experienced old hands as well. Many areas are beginning to show some rate pressure and more-than-seasonal vacancies because of additional projects competing for the same customer. While the effects are not yet serious in most cases, the full effects of the building boom are just becoming evident in many areas. While we shouldn't expect a return to the 1980s, it is likely that the rate and vacancy pressures will continue for some time and may well accelerate. Obviously, this is a trend that isn't helpful to an owner with a short- or intermediate-term objective of selling.
In summary, if you are a long-term owner, you may want to sharpen your management and marketing skills for the next phase of the cycle, but you need not (and should not) run for the exit. On the other hand, if you are thinking about selling in the near future, I think the old saying, "the sooner the better," has some real significance.
Mike McCune is president of Argus Real Estate Inc., located at 82117 St., Suite 300, Denver, CO 80202; (800) 55-STORE; fax: (303) 299-8821.