This month, I gathered a roundtable of experts to discuss the state of selfstorage in the Central United States. Let’s hear what local experts have to say about their respective cities and regions. Our panel of brokers includes: Bruce Bahrmasel, The Preferred Realty Group, Lincolnwood, Ill.; Larry Goldman, Prudential CRES Commercial, Kansas City, Mo.; John Holthaus, Cushman & Wakefield, St. Louis, Mo.; and Peter Hitler, Investment Real Estate Specialists, Mequon, Wis. These are very unique economic times, so I wanted to ask local brokers some pretty straightforward questions every owner will find pertinent.
1. WHAT ARE THE PRIMARY REASONS OWNERS SELL THEIR SELF-STORAGE PROPERTIES?
BAHRMASEL: Besides personal reasons, one owner recently expressed concern that interest rates might soon rise, driving cap rates back up.
GOLDMAN: Life events—relocation, divorce, retirement. Others, often professional real estate investors, determine the market has topped out and are motivated to sell as overbuilding is adversely affecting their occupancies. In addition to†favorable financing terms for buyers, these sellers also feel they can sell for higher prices than we will see for several years.
HITLER: The only people I see selling are the ones going into retirement or sellers who have a property that is not performing. People fail to realize storage is a retail business, and to be successful, you have to be on call for your customers when they want information.
HOLTHAUS: I agree personal reasons top the list. I also think new competition in the market can affect their decision as well. Issues like bad partners, divorce and old age cause local people to sell. If the business is doing well, it is almost impossible to get them to sell because it is the best business there is. Low cap rates help, but if the seller pays taxes on the gain, he must reinvest the proceeds in something, and it’s hard to invest in anything at a cap rate high enough to replace the income. Replacing the income stream is the hard part. Trading up to NNN (triple-net) deals makes sense, but they are hard to find, and all your eggs rest with one tenant.
2. ARE THE OWNERS IN YOUR AREA BEING INDUCED TO SELL BY LOWER CAP RATES?
BAHRMASEL: They are certainly realizing this may be a great time to sell. But on the flip side, there is concern on what they can buy to replace their current income with cap rates at such generally low levels.
GOLDMAN: Yes, especially if the facilities do not fit in their overall strategic plan.
HITLER: The lower cap rates help influence someone to sell, but I don’t feel it is the overriding issue. The primary problem is there are few places to put your investment dollar that are better than storage.
HOLTHAUS: Yes, but the new capitalgains rate should also help.
3. DO BUYERS REMAIN INTERESTED AT THESE LOWER CAP RATES?
BAHRMASEL: Those in the business are still “cherry picking” sites, and others who are working on exchanges are considering storage as an alternative investment to what they sold. However, these exchange investors need to be educated about the business, since they usually are coming from very different real estate investment backgrounds.
GOLDMAN: Competition remains stiff for the acquisition of well-designed, reasonably priced properties. This demand for quality facilities translates into lower cap rates—as long as the properties receive strong exposure to a large number of qualified buyers. While this comment may seem broker-driven, I can show you the irrefutable statistics in my area.
HITLER: When cap rates get under 9 percent, I find buyers are not interested.
HOLTHAUS: Sure, lower is better for the seller; lower interest rates help the buyer. Replacing the income stream for the seller is the problem we need to cure.
4. WHAT IS MOTIVATING BUYERS TO REMAIN INTERESTED?
BAHRMASEL: Interest rates and generally better ROIs than in other real estate investments.
GOLDMAN: The ease of management, the spreads between the costs of capital and cap rates, and investment-portfolio diversification. Successful investment in the stock market does not appear to be as idiot-proof as it did five years ago.
HITLER: Buyers like to buy a property that is under-utilized. It may mean the business can be expanded or improved in some way to increase the profitability.
HOLTHAUS: Noneconomic situations are the key drivers. It’s a great business. Once it is set up properly, it is a rather passive investment—no bathrooms, no tenant improvements, many tenants vs. being dependent on only one or two tenants. It’s an easy-to-understand business.
5. DO YOU SEE A GENERALIZED “OVERBUILDING” SITUATION IN YOUR AREA?
BAHRMASEL: Yes! There is definitely an overbuilding situation in my area. Overbuilding creates more competition, forcing managers and owners to reduce rental rates. The entire market suffers as a consequence.
GOLDMAN: Absolutely—overbuilding in the primary and secondary markets is reducing rental and occupancy rates to record low levels. Management expertise is more important than ever in maintaining market share in these very competitive markets.
HITLER: There has been a lot of building in our area. However, I have not talked to owners who are complaining about low occupancy. I do feel owners are becoming more cautious about building or expanding their businesses. If there is much more building, I think there may be an occupancy problem.
HOLTHAUS: Yes, the market is full; occupancy is running 70 percent to 90 percent.
Michael L. McCune has been actively involved in commercial 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.