Our roundtable of experts gathered this month to discuss the Southeastern United States. The Southeast has lots of buyers and some folks thinking about selling. Let's hear what our local experts have to say about their respective cities and regions. The brokers surveyed this month are Bill Barnhill, Omega Properties Inc., of Mobile, Ala.; Mark Keys, Cornerstone Realty, of San Antonio, Texas; Richard Minker, Richard D. Minker Co., of Ft. Worth, Texas; and Frost Weaver, Weaver Realty Group Inc., of Jacksonville, Fla.
1. Is it a good time to sell self-storage in your area?
Barnhill: There appears to be more individual investor interest in self-storage due to attractive cap rates compared to most other real estate investments. Because of increased product demand and plentiful capital, sellers have more opportunities to consider selling.
Keys: Right now is a great time to sell a self-storage facility. There are many qualified buyers in the market. Interest rates are at historical lows--at least for the time being. The lower cost of debt service has pushed cap rates down and, conversely, sales prices up. Despite the recent economic downturn, self-storage facilities have maintained healthy occupancy levels. Together, these factors are helping sellers get top prices for facilities.
Minker: Yes, buyers from the equities market are looking for alternate investments, especially for nice properties. There is pent up demand by the REITs and regional storage firms for realistically priced properties.
Weaver: It is a good time to sell for several reasons. The most prominent is that in Florida, there are more buyers in the marketplace than there is product available. This gives sellers more negotiating power since there is competition for desirable product. The reason is the financing market is still favorable--lower interest rates create positive leverage, and the availability of financing puts more qualified buyers in the marketplace.
2. Is it a good time to buy self-storage?
Barnhill: From a buyer's perspective, this is an exceptional time because of available interest rates, which give them a better rate spread and, thus, a better return on equity.
Keys: Rarely does a culmination of factors exist that make it a good time to buy at the same time it is good to sell. But such a situation seems to exist today. Real estate mortgages are cheap and relatively plentiful now. Self-storage offers advantages over other types of real estate. Some even say it is "recession proof." Without a doubt, investing in self-storage looks attractive in comparison to the dismal returns that alternatives like stocks and bonds are providing. Self-storage may provide buyers a safe haven in times of economic uncertainty and a good position from which to profit during the recovery.
Minker: Because of the limited number of quality products on the market, some sellers are being unrealistic in terms of value. With financing being tighter, it is tougher for new buyers to enter the industry; but when they find the right property, the returns are terrific.
Weaver: The reasons to buy are the same as those for selling. Favorable financing is available at lower interest rates creating positive leverage. There is upside potential for well-located, quality projects in that the softness in the economy for the past few years has kept rates fairly level. As the economy improves, there are expectations that rental rates in good markets will increase. A broader reason for the investor interest is self-storage compares favorably to other income property-investment alternatives. There is generally less risk because of the lower breakeven point, less maintenance costs, fewer personnel issues, simplified management, little or no unit turnover costs and good upside potential.
3. Do you believe other types of real estate are under-performing and attracting buyers to self-storage?
Barnhill: Geography plays an important role in determining whether a particular type of real estate investment is faring well. I am seeing buyers who are selling out of apartments and acquiring self-storage at higher cap rates.
Keys: Yes, apartment and office vacancies in particular have crept up much more rapidly than self-storage. What's more, these properties generally have a lower breakeven occupancy level. That means they are less able to weather such occupancy declines without going into a negative cash-flow situation. Other types of real estate also require more capital expenditures (for remodeling and make-ready) over the life of ownership than does self-storage. This leaves a thin profit margin and makes self-storage look attractive in comparison.
Minker: I think office buyers will remain office buyers and self-storage buyers will remain self-storage buyers. The greater influx into the market will be from first-time buyers of investment property.
Weaver: The retail and industrial markets are fairly strong in most Florida markets. In the office sector, there is considerable vacancy in most areas (15 percent to 20 percent), which is, at best, breakeven. In addition, as these markets improve, there is considerable lease-up cost and tenant improvements. We have had several office investors recently looking at self-storage opportunities. We have also had a number of investors moving from apartments to self-storage. Apartments are very management intensive and, for the private investor, self-storage is a very attractive alternative.
4. We have heard replacement costs are putting a cap on values. What has been your experience?
Barnhill: Investors and developers have always weighed the pros and cons of developing a new facility vs. buying an established business with existing cash flow. The question of whether one should buy or develop actually is governed more by the objectives of the buyer and how difficult the barriers to entry are for a particular market. For example, in a large city with a captive market and high land costs, the alternative of competitive development in that market may not be an overriding concern.
Keys: Some lenders are attempting to cap values at a multiple of replacement cost. This activity seems to be concentrated among the conduit lenders and insurance companies. Lending from these sources has been on the decline for the last couple of years, with local and regional banks taking up the slack for the most part. In my own experience, banks and their appraisers currently recognize that replacement cost has very little to do with the value of a self-storage facility that has achieved a stabilized occupancy. Instead, they are relying on the income and comparable sales approaches to determining value.
Weaver: This is an issue, especially in premium markets with high rental rates. However, in most situations, these rates are supported because there is little or no land in the area for new development. This objection can be overcome based on the circumstances just described--if you can support your case.
McCune: With the lenders becoming more alert to replacement costs, all owners should at least be aware that as long as there are alternative potential sites, issue will impact values.
5. Are you or your buyers having any difficulty getting loans for your self-storage sales and projects?
Barnhill: Buyers with good credit, substantial cash equity and some successful self-storage experience have no difficulty obtaining financing in our area. The banks, however, are particularly looking hard at the credit issue.
Keys: We are not having difficulty getting acquisitions funded for qualified buyers. The key word is "qualified." Loans are available, but lenders are scrutinizing the credit worthiness of potential borrowers. A strong financial statement is a must. Lenders are also focusing on a borrower's experience. If you don't have experience owning and operating self-storage facilities, retaining a professional management company may facilitate obtaining a loan.
Weaver: Loans continue to be available for qualified buyers. On the larger projects, there is financing available from national lenders. In the smaller markets, the local banks have continued to be a very good resource.
6. Having marketed self-storage properties for sale, what do you see as being the most important factor to successfully selling a property?
Barnhill: While there are many factors that are important in marketing a property, of paramount importance to a broker is developing a relationship of trust and confidence with the seller. Value range pricing of the property, of course, is perhaps the most important overall necessity to generate maximum initial interest and ultimate sale of the property.
Keys: Marketing is the key. A campaign that exposes your property to the greatest number of qualified buyers will result in a sale at the highest price within the shortest amount of time. Unfortunately, the same few buyers don't always have the greatest appetite for acquisitions and pay the highest prices. The market of buyers is dynamic and fluid. The buyers who are motivated and paying top dollar change from day to day. Marketing is what gets you the buyer who is going to pay the most for your property today. But there is more to marketing than just reaching the buyers. The message definitely matters. That is why the property presentation and how much your agent knows about self-storage are so important.
Minker: Realistic numbers and realistic expectations on pricing are important.
Weaver: Doing extensive research and analysis up front before marketing a listing has proven most beneficial. As a broker representing the seller, if I know the property in detail, understand the market for that property, and the competition in the area, it creates credibility with the potential buyer. It is also necessary to have the seller document historical income and expenses, so there are no surprises during a due-diligence period. Another factor, but secondary to that previously mentioned, is a broker's knowledge of financing that is available for the product. This can expedite the potential buyer's investigative period.
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.