By Michael L. McCune
This month, I gathered real estate experts to discuss the state of self-storage in the Southeast. Let’s hear what they have to say about their respective cities and regions. Our panel of brokers includes: Bill Barnhill, Omega Properties, Mobile, Ala.; Dale Eisenman, Midcoast Properties Inc., Hilton Head Island, S.C.; Kathleen O’Brien, Wexford/O’Brien Associates, Arlington, Va.; Chuck Shields, Beacon Commercial Real Estate, Conshohocken, Pa.; and Frost Weaver, Weaver Realty Group Inc., Jacksonville, Fla. 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. While interest rates have remained relatively low, have you noticed more interest from investors new to self-storage? Who is actively buying in your market?
Barnhill: We have had numerous contacts from new investors wanting to get into the self-storage business. There are a lot of real estate investors wanting to transfer their assets from other real estate types into self-storage. The buyers in our market have been primarily regional owners with some larger storage companies who are looking for acquisitions.
Eisenman: The low interest rates have benefited buyers of all types—those new to the business and those actively involved. They have benefited sellers by attracting more buyers who can pay reasonable values. Additionally, we are seeing local and out-of-state buyers considering self-storage properties.
Shields: In general, my territory has seen new investor interest. On average, I see one new investor call per week. The Delaware market seems to be a little lighter; though most investors, new and old, are willing to consider the majority of locations (most likely due to the lack of overall product).
O’Brien: There has been consistent interest in my market from investors new to selfstorage. The low interest rates have not changed that. I have seen existing owners want to expand portfolios and add locations. However, there is still diligent attention to the basics—either “location, location, location” for new facilities, or an analysis of the operating history of an existing one. I have also seen an interest in underperforming locations, those facilities that would benefit from more diligent and competent management, where an upturn in profit can be anticipated.
Weaver: We continue to have inquiries from investors new to self-storage, but have not seen a change in their level of interest because of lower rates. There is continued attraction, but this is based on more investors becoming aware of the benefit of self-storage ownership as compared to other types of properties. While there is growing attention from potential new investors, active buyers still tend to be those already in the business. They are more knowledgeable about the physical product and, more important, what it takes to improve the bottom line to increase the value of an investment.
Generally speaking, historically low interest rates are making geniuses of buyers and sellers. These are unique times.
2. In other parts of the country, we are seeing buyers become more selective and price-conscious. What is the attitude in your area?
Barnhill: Buyers are indeed more selective in that they are seeking quality properties with good demographics.
Eisenman: All of the buyers I encounter want reasonable value but, for some, if their buying criteria are too conservative, no properties qualify. Not all buyers have the same objectives or goals. Some are looking for properties with well-established and stable net operating income and high occupancy. Others seek properties that may have a lower occupancy or NOI, thinking they can affect and improve them, thus providing an upside opportunity.
O’Brien: These are always the basics: Location and historical performance are always important. I think self-storage investors have always been price-conscious, and this is reflected in the examination of the actual—not the pro forma—operating statements. The numbers are what they are.
Shields: To date, investors are telling me they are willing to consider anything, anywhere, at any price, just so they can have the opportunity to be exposed to a property. After they get more details and have a chance to evaluate the property, they become more selective. I believe this “show me everything” attitude is due to the lack of product in the market.
Weaver: Regarding buyers becoming more selective and price-conscious, we don’t see a change in Florida. There is such a scarcity of product that decent properties are acquiring significant attention very quickly. We recently listed a property on a Friday, and I had a contract on the following Monday.
Since most buyers are either current selfstorage owners or experienced in other forms of real estate, they are sophisticated and know what property values are within a very narrow range. There are not any “greater fools” here, just rational buyers in a good market!
3. What are the most important things a seller should keep in mind when deciding to sell a property?
Barnhill: Most sellers should engage a knowledgeable broker seasoned in selfstorage acquisitions. There are numerous aspects and caveats to consider that an experienced broker would recognize.
Eisenman: A seller should recognize that, with the proper representation and marketing, a property will attract a buyer who will pay a fair and reasonable price. He should keep in mind active buyers are successful businesspeople and, often, self-storage owners. Accordingly, they are sophisticated buyers who understand the underlying concepts that drive values. The key is to present the property to a large universe of potential buyers to attract one or more who will make serious offers on terms and conditions acceptable to the seller. In preparation, the seller is well-advised to provide his representative good records that demonstrate a net operating income to support the value he seeks.
Shields: This assumes the “seller” is actually a seller! It is the most important underlying factor, because unless a seller is committed to make the sale, he might not be receptive to the realities of the marketplace. These are some of the considerations to which a seller should be sensitive:
- Price—This is probably the most important consideration, because it must be based on real value and cash flow of the property.
- Exposure and Marketing—How is the property entering the marketplace? In what light is it going to be shown, and who is going to do it?
- Evaluating the Marketplace—What are the conditions of the economy? Where are interest rates? Is your market overbuilt?
O’Brien: I think the most important thing a seller should keep in mind is the importance of good historical records.
Weaver: When considering selling, curb appeal through proper maintenance is important. However, the most significant issue is good and accurate, historical, financial information. Most private investors don’t keep very good records. In most cases, they have personal expenses that have to be filtered out. This can be very time-consuming and create misinformation that is hard to correct. We have taken a position that until we have good, accurate information, we won’t proceed with listing or marketing a property, as it obviously impacts the value and sales price.
I think that the two most important things for a seller to know are 1) selling is his objective and 2) having good records is imperative.
4. How would you describe your market in terms of benefiting buyers, sellers or both?
Barnhill: There are many more prospects than there are properties for sale. Since the Southeast has the best economic outlook in the United States, many buyers are looking to locate here. There is a great deal of demand in the Florida coastal areas.
Eisenman: This market is one in which buyers and sellers can benefit from solid properties and low interest rates. I approach all potential property sales as win-win situations. Both parties can—and should—benefit from the transaction and the relationship.With capital gain rates at all time lows, coupled with low interest rates, buyers are able to secure good value with excellent financing; and sellers can enjoy converting a nonliquid asset to cash at historically low tax rates.
O’Brien: My market is a strong growth market. The five-year projected growth in one county is 35 percent. Obviously, this will create demand for self-storage facilities. This, in turn, will benefit the seller and buyer.
Shields: This is a sellers’ market. The fact there is limited product in all classes enables sellers to ask very aggressive prices. Buyers, on the other hand, are able to buy these facilities because of the favorable interest rates. Development in many areas is also strong, because several markets are not overbuilt, and there appears to be a need for more units.
Weaver: This is a good time for sellers, because there is strong demand and lower interest rates provide attractive leverage. For buyers, Florida is a growing market that will generate considerable upside potential over the long term.
5. In general, have you noticed a change in REIT activity in your area? Which, if any, REITs are active in buying or selling self-storage properties?
Barnhill: We have not recently noticed any change in REIT activity in our market. Reportedly, Sovran is interested in expanding in Florida. Most of our work has been with regional and local buyers.
Eisenman: The REIT activity we see is Storage USA spinning off its secondary locations.
O’Brien: REITS are very active in my immediate market in every sector of commercial real estate—office buildings, multifamily communities, industrial and self-storage. This is true of Baltimore, Md., Richmond, Va., Washington, D.C., and other major urban areas. REIT interest diminishes as the urban areas transition to a more rural landscape, where the population density cannot support large facilities.
Shields: Some REITs are actively developing in selective areas, and others are thinning their portfolios in certain markets. In general, there has been little change with most of them. REITs have the capital and management to continue developing in certain markets, and they will eliminate those facilities that are less profitable.I have noticed All Seasons Storage and United Storall have been somewhat active in developing additional sites, whereas Storage USA has marketed a few of its sites for sale.
Weaver: We have not noticed a change in the activity of the REITs in our area; they have been here before and are still in the market. However, in some cases, they have become more aggressive for properties they really want. A property in south Florida that sold for a 9.5 percent cap less than two years ago recently sold to a REIT for a 7 percent-plus cap rate.
Nationally, the REITs have recently tended to develop more and buy less. In some cases, they have been very active sellers of properties, but mostly for “repositioning” purposes.
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 1994, he created the Argus Self Storage Real Estate Network, now the nation’s largest network of independent commercial real estate brokers dedicated to buying and selling self-storage facilities. For more information, call 800.55.STORE or visit www.selfstorage.com.