Our roundtable of local experts gathered this month to discuss the East and Northeast United States. Let's hear what they have to say about their respective cities and regions. This month's brokers are: Linda Cinelli, Insignia/ESG Inc., East Brunswick, N.J.; Joe Mendola, The Norwood Group Inc., Bedford, N.H.; and Kathleen O'Brien, Wexford/O'Brien Associates, Arlington, Va. Because of the unique economic times in which we find ourselves, I have added some comments on the national market to contrast the regional market.
Is it a good time to sell self-storage?
Cinelli: In my opinion, the Northeast sellers should realize investors are running away from the stock market and looking to put their money in a more solid investment. The sale prices may reflect pricing slightly lower than 10 percent cap rates for the best properties. The only problem is rental rates are softening in some areas, causing some buyers to be more cautious.
Mendola: Yes. There is so little good product that comes on the market in the Northeast. The demand far outweighs the supply of properties for sale; thus, a seller is somewhat in the driver's seat. However, pricing is still sensitive to real value as cap rates are still at 10 or more.
McCune: With interest rates so low, a deal with a 10 cap rate will generate 15 percent cash-on-cash return in most cases; but buyers are also reflecting the uncertainty in the market place and economy, so they are looking for value as well as return.
Is it a good time to buy self-storage?
Cinelli: Again, investors are unsure of the stock market, and they have discovered the virtue of the cash flow a self-storage investment can provide. Companies are downsizing, people are moving and relocating--the storage business is better than ever!
Mendola: Yes, for the same reason as the previous question. Also, there are very few investment products that have the returns self-storage has. I cannot think of another real estate product that has such good returns, given the level of management and capital required. There are no tenant improvements to be provided, and the utility and insurance costs are relatively stable by comparison to other real estate investments.
McCune: Many people think tough times are the best to buy self-storage facilities; however, the low interest rates currently available are really like lowering the price by as much as 30 percent because the debt service is lower, and the returns are higher than on "work out" properties.
Do you believe other types of real estate are under-performing and attracting buyers to self-storage?
Cinelli: In my market, the office vacancies are at 25 percent, and industrial vacancies are at 10 percent to 17 percent, depending on the corridor. Retail is somewhat at the absorption level. Self-storage seems to be a great investment experience--with the right management in place and the right location. Once again, it has low capital requirements and is somewhat unrelated to other real estate products, i.e., if retail is doing poorly, it does not have much impact on self-storage.
Mendola: Yes. However, other properties are over-performing, such as apartments. High prices for apartment buildings are bringing those buyers to self-storage.
O'Brien: WorldCom and a number of high-tech companies have a large presence in my market. The office-vacancy rates in some areas are rising to levels we have not seen for some time. Commercial buildings, with more of a tenant-risk factor, are not achieving the high-dollar prices that were once commonplace. Self-storage is seen as having less risk, as long as the old "location, location, location" real estate rule is followed. I think this is the self-storage industry's time in the sun.
McCune: Mendola has a great point. Apartments are still getting high prices, but that market is getting overbuilt around the country. The operating costs are higher, and management is much more intensive--all for a lower return than self-storage.
We have heard replacement costs are putting a cap on values. What has been your experience?
Cinelli: The lenders are becoming much more aware of replacement costs. Thus, to the extent replacement costs inhibit their lending, it will impact the value of some properties where the potential for new competing facilities exists.
Mendola: People are always trying to come close to replacement costs. In the Northeast, people remember when self-storage was not in vogue. They are also aware of what it costs to build self-storage. So, if they can own as close to replacement cost as possible, they will be in a position to compete more effectively--if someone comes along and builds in this market.
McCune: The best argument against replacement cost is the fact a facility has no potential for major competition in the immediate area or has a unique customer base.
Are you or your buyers having any difficulty getting loans for your self-storage sales and projects?
Cinelli: The lenders are getting more cautious, and rightly so. Loans are available, but the loan-to-value may differ on the borrower's credit worthiness and the value of the project.
Mendola: Not at 90 percent occupancy rates. There is very little desire to finance self-storage without high occupancies. If the occupancies are not high, or there is too much supply or a bad location, financing can be difficult. Either way, those situations are not easy to finance in our market.
McCune: Financing is widely available for good projects and the rates are the best they have been in 40 years. The difficulty, of course, is all projects have some unique characteristic lenders don't appreciate or understand. That is why it can be important to have a good real estate agent and mortgage broker who understand self-storage and work together to solve the problem. These low interest rates won't last forever. If you are thinking of selling, now is the time. If you aren't going to sell, think about refinancing.
Having marketed self-storage properties for sale, what do you see as being the most important factor to successfully selling a property?
Cinelli: Location! Location and the opportunity for increases in income. Most investors would prefer to buy with the vision of an upside to the cash flow. Some institutions want consistent cash flow, yet upside is still an important factor.
Mendola: Location and barriers to entry. Properties must also be visible to high-traffic areas. Communities should have a scarcity of developable land in zoned locations to limit the competition.
O'Brien: The most important factor to successfully selling a property is pricing the property realistically, i.e., taking into account real, not fictionalized, income and expenses and projecting increases according to standard local averages.
McCune: The seller should be committed to selling the property. We have found if the seller is not committed, he tends to price the property too high and react too slowly to serious buyers. This not only ensures the property will not sell quickly, but also has a high probability of causing the property to sell at a lower price. The seller becomes desperate after the property has been on the market for a long time and serious buyers have bought other facilities.
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.argus-realestate.com.