By Maurice Pogoda
It's no secret that we are experiencing a self-storage boom. Occupancies are high, rents continue to increase, and most owners have cash flows they never dreamed possible. With business so good, why would anyone consider selling? And, if they did decide to sell, why bother with a broker? As usual, the answer comes down to time and money.
A Growth Industry for the New Millennium?
What a difference a few years can make: Just seven or eight years ago many owners were worried about holding onto their properties in the face of the Savings-and-Loan crisis. In contrast, the late 1990s have been characterized as a period when self-storage appears to have come into its own. Wall Street, institutional investors and a multitude of individual investors have all discovered the viability of self-storage as a real-estate form that can achieve exceptional returns.
The late 1990s have been a seller's market. While hordes of first-time self-storage buyers search for the right property, real estate investment trusts (REITS) became the buyers of choice for any well-located property greater than 40,000 square feet. REITS were so aggressive in their desire to secure market share that prices rose to unheard of--and what many considered to be unsustainable--levels. The fall 1998 crash of the securitized loan market hurt the REITS' ability to raise capital, effectively taking them out of the market for about six months. Starting in the spring of 1999, the REITS slowly began to search for new properties, but were not paying the same prices as before.
As sale prices increased above replacement cost, investors and developers, many with no self-storage experience, began searching for land to build new properties. In the mid-'90s, after years with little or no construction, new facilities began to mushroom. High consumer demand and cheap money fueled the greatest self-storage building boom since the late 1980s.
For those of us who lived through the real-estate depression of the early '90s, it seems like "deja vu all over again." Some areas have already become saturated, with occupancies starting to dip. Occupancies in the 80 percent to 90 percent range have once again become commonplace. Rental rate increases, while commonly 5 percent to 8 percent every year in the mid-'90s, have slowed down considerably in all except select locations or on specific sizes that tend to vary by area.
Have You Missed the Boat?
If you have not sold your facility, but are considering selling, your local market conditions will determine if you can achieve a high sale price or not. The industry psychology stills favors the seller. We are not yet in the downward phase of the real-estate cycle as is evidenced by relatively low interest rates and the strong national economy. Buyers still consider self-storage to be a "hot" property type.
The greatest concern to a potential seller is overbuilding. It is a concern not just for the new self-storage developer, but to existing stores as well. While it is likely that a new developer has the most to lose (higher land costs, higher construction costs and no occupancy), the owner who would like to sell his store will not get the highest price if he is in a market with falling occupancies. The owner with an older property can probably weather lower occupancy because of his lower initial costs and a base of existing tenants.
An area with falling occupancies will also have decreasing rental rates as competitors resort to discounting prices to attract tenants. This vicious cycle is nothing but trouble for the owner who wants to sell. Most buyers look at current and future income. If your occupancy and income are going down, you will not receive the same price that you might have before new competitors spoiled the fun.
If you are blessed by being in a market with little or no new competition, there is probably no better time to sell than now for the reasons mentioned above (low interest rates, strong economy, etc.). If you are aware of new competitors considering entry or about to start construction, it may not be too late to still achieve that dream price.
How Can a Broker Help?
A good broker can help you realize a sale price considerably higher than you might receive on your own, even net of commission. A self-storage specialist will know how self-storage properties are sold (e.g., capitalization rates), who the buyers are--both locally and nationally and--in general, will understand the nuances of the industry.
A knowledgeable self-storage broker will guide you and the buyer through what is often a very complicated process. He will be comfortable dealing with attorneys, bankers, inspectors, the title company, environmental company and surveyor.
The first place to start in finding a good broker is to ask some questions:
- Are they properly licensed?
- Are they specialists in self-storage brokerage?
- Will they supply you with references?
- How many facilities have they sold?
- How will they market your property?
- What are their fees and what do they include?
Finding a broker who specializes in self-storage is of paramount importance. Giving your friend at the local Century 21 office your listing will cost you time and money.
The Sale Process
Once you have hired your self-storage sales specialist, he should help you set a realistic sale price, allowing some room for negotiation, and put together a marketing program that combines advertising, direct mail, personal contacts and property showings. This is a targeted program focused on the most likely prospects for your property.
The first step in this program is a detailed brochure for potential buyers. This package should contain all the necessary information that a buyer will need to make an educated offer on your property. It should include: property address, directions, lot size, information about the area, zoning, a unit mix with rental rates and occupancy by size, current income and expense information for the past 12 months and prior year, an as-built survey of the property, location maps and pictures of the property.
Once you have approved the marketing brochure's contents, your agent should search his database of self-storage buyers, contact other self-storage brokers, advertise in appropriate mediums and arrange showings of the property with the most qualified candidates that will consider buying your property. If the above process is followed by a qualified self-storage sales specialist, you will most likely have numerous offers to consider. Now the fun begins.
Negotiating the Sale
Negotiating the sale can be the most challenging part of selling. The sales agent can be most useful in guiding both parties through what can often be a very tense situation. The agent's value becomes apparent by the skill they show in helping the seller and buyer achieve mutually agreeable price and terms without rancor. The agent is the "buffer" between buyer and seller.
The period between the signed purchase agreement and the closing is usually several months. During this time, known as the "due-diligence" period, the buyer will examine your physical property and financial records and obtain financing. A good agent will be instrumental in helping make this as smooth a process as possible. Coordinating the closing with the attorneys, title company, mortgage company, buyer and seller is the final task performed by your self-storage sales specialist.
So, Do You Really Need a Broker?
It depends. Theoretically, a broker that specializes in self-storage sales will expose your property to qualified buyers, which will result in more offers and a higher price. He will also save you much time and effort by coordinating the myriad of nitty-gritty details inherent in any transaction. If you value your time more than the cost of the commission, it is well worth it to hire a qualified broker. If you consider yourself to be an "insider" who is well-versed in real-estate transactions, knows the "players" in the industry, understands sales trends, is a good negotiator, and is willing to do a tremendous amount of legwork that will consume an inordinate amount of your time, selling your property yourself may be the right way to go. If not, leave it to the professionals.
Maurice Pogoda is president of the Pogoda Companies based in Farmington Hills, Mich. Pogoda specializes in the brokerage and management of self-storage facilities in the Midwest. The company has brokered more than 50 self-storage sales and currently manages or owns 22 self-storage facilities, with two more under construction. For more information, call (800) 326-3199.