This month, I gathered real estate experts to discuss the state of self-storage in the Northeast. Lets hear what they have to say about their respective cities and regions. Our panel of brokers includes: Linda Cinelli, LC Realty, North Branch, N.J.; and Joseph Mendola, The Norwood Group, Bedford, N.H. These are unique economic times, so I asked our brokers some straightforward questions every owner will find pertinent. I have also added my own comments and observations.

1. Are appraisal values below actual sale prices? In some of the hot markets, these dont always match. Is this happening in your area?

Cinelli:

Appraisals in my area are typically higher. What seems to be happening is the variable expenses are not being taken into consideration. It definitely has an effect on value. It also depends on who is asking for the appraisal. If its a lender, it could impact the asking price and the market value. Lenders tend to impose greater discipline on the process and, in a very strong market, the appraisal might not match the sales price, which clearly has an impact on the financing.

Mendola:

No, appraisals are coming in at about the same as the selling price; and the selling price is very close to the asking price for a properly valued property.

Many people are often confused with the appraisal process, as they tend to think it is a worst-case condition, not merely a reflection of the anticipated market. The key phrase here is anticipated market. Reasonable professionals can disagree on what is expected in a market, and the perception of value can differ based on assumptions for the future. Appraisers have a rigorous methodology they apply to historical data and projections in arriving at values. Some investors may have a very different view of the futureand, indeed, varying circumstances may impact the valuebut not the market the appraisal tries to forecast.

For example, if an owner has other facilities in the market, he may be able to save money on Yellow Pages advertising and supervision, which creates more value for him; but this cannot be considered by the appraiser in looking at the market. Lenders often have to look past the special circumstances to lend to the higher level of value a buyer may see because of his situation.

2. What are the cap rates for reasonably projected incomes in 2004?

Cinelli:

In general, Im seeing 9 percent to 9.5 percent, but the range is quite broadlarger than in past markets. The cap rate is clearly dependent on the quality and location of the property. Buyers are more discriminating than ever! Last year, some investors were willing to take returns below those rates, but with the market recovering, they will want a stronger rate of return on their money. Some properties will demand at least 10 percent or better. Newcomers to the industry will sometimes settle for a lower cap rate to get into the business.

Mendola:

Im seeing rates in the neighborhood of 10.5 percent, depending on the size of the property and the quality of the site. In the greater Boston market, however, values are determined by the trailing 12-month income at stabilized occupancies. A cap rate for that number is 9.5 percent to 9 percent. It can go lower if we are talking about a portfolio, or if the barriers to entry are high and the demographics are great.

Linda and Joe have really identified the keystone of todays market: A great property in a great market gets a great price in terms of the cap rate. While there are buyers for lesser properties, they are less willing to pay premium prices for poor locations and quality. There are no greater fools in the market today; they are either experienced investors or well-represented by real estate professionals.

3. Are you seeing markets experiencing moderate (15 percent) or significant (25 percent or higher) vacancy rates?

Cinelli:

This is not a problem in my area; vacancy rates are not high at all. Id say moderate to low. Self-storage facilities are really filled up in New York and New Jersey.

Mendola:

For well-located properties in New England, the vacancies are 15 percent. Otherwise, facilities might experience a more significant vacancy. A rule of thumb would be that the closer to Boston, the higher the occupancy; but there are many other strong markets as well. Having said that, due diligence is very important, as overbuilding is a real possibility in any local market.

It is imperative that every buyer or developer do his homework to make sure the local market can support the project. Overbuilding is a growing problemno pun intendedin every area, even the very strong markets like the Northeast.

4. Have you seen lenders becoming more careful on the underwriting of self-storage loans?

Cinelli:

Lenders are going to be more careful when the borrower doesnt have credit to back up the deal. Then it really depends on the buyers credit worthiness. Otherwise, the lenders are taking a more thorough look at the deal; they are not taking many chances at these low rates.

Mendola:

Yes, particularly where supply and demand are in equilibrium and barriers to entry are not high.

Lenders are having some difficulty with industry data not being accurate or complete. They arent sure the demand is predictable. Industry expert Ray Wilson recently wrote an article in the SSA Globe about this issue of information. It is just beginning to be recognized as a serious problem, and Ray is heading up a task force to work on this. Cooperating with his group could be one of the most important things owners can do.

5. Are the most active buyers in your market newcomers to the industry, or are they seasoned veterans of self-storage?

Cinelli:

Seasoned self-storage investors are always looking. Actually, theres no shortage of potential buyers at all. There are many newcomers who have heard what a great investment self-storage is, and they are excited but cautious. After the fall of the stock market, these folks are looking for a good return, with as much or as little hands-on management as they want. Self-storage is the way to go because it does not seem as complicated as other real estate. Of course, the experienced buyers are very active in the market as well, and are often the surest buyers for good properties.

Mendola:

Buyers fit in both camps. There is still a strong desire to own self-storage; however, buyers are sharpening their pencils more when it comes to valuations and upside potential.

Newcomers are a little more eager but harder to qualify. Veterans know value better, but they are willing and can pay for it. The result is you have to approach both groups to get the best price.

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 nations 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.