This month's roundup will focus on self-storage as an investment vs. other types of real estate. I surveyed our Southwest brokers for their insight: Kent Curtis, Thanksgiving Property Group, Provo, Utah; Joan Lucas, Joan Lucas Real Estate Services, Denver; Chuck Reiterman, Hanson Realty, Phoenix; and Chuck Witters, Lee & Associates, Las Vegas.
1. Is it a good time to sell self-storage?
Curtis: Absolutely! Depending on the individual situation of each seller, it is a great time to sell. The recovering economy is bringing good real estate investments to the surface. Sellers can take advantage of low interest rates to find optimum leverage opportunities.
Lucas: It's a great time to be a seller in Denver. There are probably 25 buyers for every self-storage listing that comes along with expansion capabilities, good visibility and a decent operating history.
Reiterman: This is a great time to sell self-storage. The Arizona market is particularly a good place to sell.
Witters: There are a lot of buyers--serious buyers as well as lookers. Interest rates at these levels mean very high cash-on-cash returns.
2. Is it a good time to buy self-storage?
Curtis: Again, absolutely. Depending on the individual situation of each buyer, a self-storage investment is a great place to put your money. Historical statistics show returns on self-storage investments are quite healthy.
Lucas: With all the competition for good product and so many buyers, the market keeps prices high. If you are a buyer in Colorado and you find a property priced right, you need to strike while the iron is hot!
Reiterman: Yes, self-storage has always been a great investment and now is a great time to buy.
Witters: Buyers have many alternatives with the stock market and other real estate in the tank. And besides, the cash-on-cash returns are phenomenal.
3. Do you believe other types of real estate are underperforming and attracting buyers to self-storage?
Curtis: According to CRE surveys, shopping and retail investment returns have dipped below 10 percent. Hotels are barely above 10 percent. This is just one force moving people to self-storage. I do believe, though, that the lackluster performance of retail investments, as well as the glut of office space on the market, is making nontraditional types of real estate investments more attractive.
Lucas: In Denver, housing foreclosures posted their biggest first-quarter increase since 1997, and at least one economist is saying it can get worse. Vacancies are up in all segments of investment properties, from apartments to industrial/office buildings and retail spaces. As an industry, self-storage does a great job getting the word out that, as investments, its projects are somewhat recession-proof. It appears investors are taking a more conservative look at the placement of their money.
Reiterman: With cap rates outperforming other types of real estate, self-storage is an attractive place to invest.
Witters: Yes, I'm getting a lot of inquiries from other types of real estate investors. Self-storage is the new "darling" of real estate.
4. We've heard replacement costs are putting a cap on values. What has been your experience?
Curtis: I have no experience with this.
Lucas: It's true replacement costs are sometimes less than the price per square foot for an existing facility. However, it is also true that it gets more difficult all the time to find a site that will work for self- storage, as well as one the municipalities will approve for this type of development. Ground prices have skyrocketed, and with more facilities, lease up can take 18 to 24 months. Therefore, investors are quite willing to pay for the privilege of owning an existing facility.
Reiterman: This has not been the case in my area.
Witters: Unless there is some unique character to the facility that limits entry by new facilities, replacement cost is definitely a limiting factor.
5. Are you or your buyers having any difficulty getting loans for your self-storage sales and projects?
Curtis: None. As long as they are well appraised, the banks have not had a problem loaning on storage facilities.
Lucas: No, not yet.
Reiterman: Debt-coverage ratios and loan-to-value ratios are getting increasingly more conservative.
Witters: Money is available. The process can be difficult, but well worth it at these rates.
6. Having marketed self-storage properties for sale, what do you see as being the most important factor to successfully selling a facility?
Curtis: In my opinion, the due diligence has the greatest impact on the success of a marketing strategy. Get the numbers right the first time, and get them in front of the most people possible. Get the package into wide distribution and your results will be laudable.
Lucas: The most important aspects to selling a property are to price it right and seek the advice of a professional in the industry to understand cap rates, prices per square foot, operating-expense ratios, etc.
Reiterman: The most important factors are room for expansion and the ability to increase income. Ability to expand is very important for potential buyers.
Witters: The most important thing is to price properly--too high a price will cause the property not to sell at all. Experienced buyers or their brokers will know it's too high. A low price will have the obvious problem of not maximizing the return. Remember, there are no "greater fools"--even if they appear, they never close, and you miss a real deal!
Michael L. McCune has been actively involved in commerical real estate throughout the United States for more than 20 years. Since 1984, he has been owner and president of Argus Real Estate Inc., a real estate consulting, brokerage and development company based in Denver. In January 1994, he created the Argus Self Storage Real Estate Network, now the nation's largest network of independent commercial real estate brokers dedicated to the buying and selling of self-storage facilities. For more information, call 800.55.STORE or visit www.selfstorage.com.