This month's travels take us to the Northwest United States, a fast-growing area of the country with an active self-storage market. Let's hear what our local experts have to say about their respective cities and regions. Joining us in this survey are our Northwest brokers: Richard Arnold, Arnold/Forcum & Associates, Portland, Ore.; Larry Hayes, Larry Hayes & Associates, Missoula, Mont.; and Marc Neumann, Wallace Properties, Bellevue, Wash. Because of the impact of the recession, I will also make some comments on the national market to provide contrast.
1. Is it a good time to sell self-storage?
Arnold: I believe it to be a good time to sell. Since I placed my last listing on the market, I've received two to four calls or e-mails per day, mostly from very interested and qualified parties. I could have written several backup offers had I chosen to do so.
Hayes: This is an ideal time to sell--interest rates are low, which allows an investor a higher after-debt return.
Neumann: It's a very good time to sell because interest rates have never been lower. Cap rates for self-storage are more attractive than other real estate investment vehicles at this time. However, in the state of Washington, there's little inventory for sale, possibly due to seller indecision as a result of the recent economy.
2. Is it a good time to buy self-storage?
Arnold: It is also a good time to buy self-storage. Returns on other types of properties have been reduced, while at the same time, interest rates have not been lower in recent history. This obviously increases cash flow for the investor.
Hayes: Yes. It's a good time to buy while interest rates are low.
Neumann: It's a good time to buy and lock in low interest rates. I wish I had more inventory to sell!
3. Do you believe other types of real estate are under-performing and attracting buyers to self-storage?
Arnold: In my area, other types of real estate are seeing move-outs, subleasing and high vacancy rates. To my knowledge, self-storage has been little affected.
Hayes: A surplus of money (much of it 1031-exchange money), low interest rates and a volatile stock market have driven prices up and returns down on most investment real estate, including self-storage.
Neumann: Other types of real estate investments, such as apartments, are selling at very low cap rates. Self-storage is a much better investment vehicle because the return on investment is higher. Other forms of real estate, such as office and industrial space, are not a good investment now due to high vacancy rates.
McCune: Self-storage continues to be the darling of the real estate business as occupancies and rates stay high. The consistency of the cash flow is attracting investors in these uncertain times. Ten or 11 percent cash-on-cash returns look very good compared to the stock market.
4. We've heard replacement costs are putting a cap on values. What has been your experience?
Arnold: For the most part, replacement costs do not take into consideration the blood, sweat and tears the owner expended filling up his existing property. It's an old appraisal axiom that a property is not worth more than its replacement cost. It's a rough guideline, but it will never replace the income approach to value. However, if there is a potential site nearby that looks promising, replacement cost can put a limit on pricing.
Hayes: If there's a strong demand for space, it is not difficult to sell at a premium to replacement cost. When lease-up has been long-term, a buyer can rationalize paying a little extra.
Neumann: Replacement costs for improvements are not much different today than in past years, but land is more expensive. Storage properties that are appropriately priced will sell in the marketplace. If they are priced too high for the market, they will languish.
5. Are you or your buyers having any difficulty getting loans for your self-storage sales and projects?
Arnold: The last property I sold had five lenders wanting to loan on the property. Not all wanted to loan the required amount, but they were all genuinely interested.
Hayes: No. Local lenders will loan on properties with a good operating history.
Neumann: Money is relatively available. To qualify, specific criteria must be met, so it's more difficult for the highly leveraged investor. If a buyer has 30 percent to put down with a good financial record, the money is easy to find.
McCune: Money is available across the country to good facilities, but lenders are a little more "picky" about quality and the consistency of the cash flow.
6. Having marketed self-storage properties for sale, what do you see as being the most important factor to successfully selling a facility?
Arnold: The most important factor is the price. It must be in line with current cap rates. But of almost equal importance is that the property appear to have been well constructed, maintained and managed.
Hayes: A strong, well-documented operating history with good management in place. The cash flow is what investors want, and they want to be sure it is there.
Neumann: Price and location probably top the list. National exposure to buyers and sellers also has a lot of value. The ability to e-mail a property package to a client definitely makes the process quicker and easier.
McCune: A good market also helps, and this market is a dandy!
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.