The Wild West

By Michael L. McCune

This month, I gathered real estate experts to discuss the stateof self-storage in the West. Lets hear what they have to say about theirrespective cities and regions. Our panel of brokers includes: Clifford Crowe,Lee & Associates, Carlsbad, Calif.; Larry Hayes, Hayes & Associates,Missoula, Mont.; Ron Largent, Coldwell Banker/C&C Properties, Redding,Calif.; Joan Lucas, Joan Lucas Real Estate Services, Denver; and Michael McVay,Lee & Associates, Carlsbad, Calif.

This is a great overview of current market conditions in theWestern United States. All over the country, we are seeing a slight ripplebeginning, which might be an early indicator interest rates are on the rise. While rates are still low, we encourage owners who have eventhe slightest thoughts about selling to take a closer, more serious look at therewards the market can offer.

1. What are the most important things a seller should keep inmind when deciding to sell a property?

Crowe:

A seller wants his propertyto be fully and accurately represented in its packaging, making sure thebenefits and potential benefits, as well as all the obstacles, are communicatedsimply. He wants his property fully exposed to the market in hopes of a buyingfrenzy. Then he wants a good negotiator on his behalf, with the wisdomto generate a sound transactionone that will close with little complication. The seller also needs to be sure his negotiator is obligatedto him and not the purchaser.

Hayes:

A seller should considertiming, for maximum price, and planning, to keep after-tax potential high.

Largent:

I think this is influencedby the area, the market, etc. However, it seems to me that sellers are lookingat two big factors: retirement and his personal situation.

Lucas:

A seller should look at hisproperty through a buyers eyes. What would he look for if he were going to purchase aproperty? First impressions really do count. Spend the money to paint thebuildings and fix the asphalt, and make sure the property is clean and neat. Gothrough the books and bring all the late pays current. Tell your manager you aregoing to sell, but offer an incentive to work hard during the transition periodto get more business in the door.

McVay:

The most important thing aseller should keep in mind when deciding to sell would be to make sure he getshis property professionally packaged and marketed by a broker who will presentthe facility to as many qualified buyers as he can.

2. Describe your overall market. How do you think the marketconditions are benefiting buyers and/or sellers?

Crowe:

In Southern California, themarket is robust. There is a huge demand, but very little product. The cap rateshave declined as much as two points in the last two years, yielding the highestprices ever. This is due to a lot of 1031 money in the marketplace as well aslow interest rates.

Hayes:

The high prices, because oflow interest rates, being paid to sellers provide an excellent opportunity toexit the business at the peak valuation. It is assumed that prices willdeteriorate when interest rates rise.

Largent:

In three cases currently onthe market, all the sellers are retiring. Why now? Because there seems to be atrend for apartment and other multifamily property owners to get out of themanagement of these investments, and self-storage looks very good. Financing isalso good right now, and self-storage is pretty popular with lenders at thistime.

Lucas:

The market in Colorado hassoftened somewhat due to the economy and the fact that, in the last severalyears, many new facilities have come on stream. Most owners are offeringincentives to get new tenants in the doorfree boxes at move in, free use ofmoving truck and free rent. The well-run, newer properties continue to outshinethose older ones in marginal locations. While one would expect buyers are morecautious in their underwriting of self-storage deals, investors still havestrong expectations that the Denver market will rebound; and they continue topay top dollar for well-located, newer facilities.

McVay:

The market is great. There isa huge demand and very little supply. Thus, market conditions are benefitingsellers due to the low interest rates and the lack of product. Since there is alack, a seller is able to get the maximum amount of money possible for hisfacility.

3. With interest rates still relatively low, is there moreinvestment interest from newcomers to the industry? Who is actively buying inyour market?

Crowe:

The self-storage industry isattracting investors who previously have been in other product types. Theyrecognize the industry has many advantages over other investments as well as areturn that may be slightly higher. Those actively buying range from the single investor coming into the market for the first time to thosewho have been heavily invested in other types and are changing horses. Those who have multiple storage facilities are also activelytrying to increase their portfolios as rapidly as they can.

Largent:

Its a good market, butnot overwhelming. Quality properties with reasonable listing prices are gettinga lot of action. There are many more buyers than sellers, as is typical in agood market. It is definitely a sellers market in Northern and CentralCalifornia.

Lucas:

Unlike so many other sectorsof commercial real estate, self-storage brokerage continues to be strong.Office, apartment and office/warehouse vacancies continue to be on the rise,while, as a whole, self-storage plugs along. We see and hear from newcomersalmost on a daily basis. The deals being done in the Colorado market are byexperienced, savvy buyers who are well-positioned to move quickly when they seea great opportunity, complete their due diligence, and close on the deal.Newcomers have a hard time comprehending that they have to move fast when theysee a self-storage property for sale and there arent any fire saleproperties available out here.

McVay:

There are a lot of newcomerstrying to break into the industry. Its tough finding much product in theSouthern California market for first-time buyers due to high prices and a lackof owners wanting to sell.

4. Which REITs, if any, are actively buying or selling in yourmarket? Have you noticed a change in REIT activity in your area?

Crowe: I know the REITs would like to be active in thismarket, and they would be if there was more product. They are active behind thescenes, dealing mostly with portfolios.

Hayes:

Currently, and in the recentpast, I have not seen any activity from the REITs in Montana or Idaho.

Largent:

Question No. 3 aboveapplies here as well. Newcomers call almost daily, and the reasons are as weveall stated above. They are finding self-storage owners in their area do verywell. Mainly, they see that two plus two makes an easy four.

Lucas:

While all of the REITs have astrong presence along the Front Range of Colorado, only Shurgard has continuedto build new facilities. Several years go, all of the REITs were very active, trying tobuild or buy; but again, due to the overall economy and surplus of units, thatactivity has slowed dramatically.

5. In other parts of the country, we are seeing buyersbecoming more selective and price-conscious. Is this true in your market?

Crowe:

I think everyone isprice-conscious, but their consciousness is also tied toand often limited tothelocal market. Getting a good buy is always in the eye of the beholder. Is his investment going to give him the best yield and fit inwith how he wants to operate? Many investors are savvy enough to recognize an investment isnot just the cap rate but includes many other things, such as appreciation,lifestyle, etc.

Largent:

It is very true in theCalifornia market, for a trend to buy whatever hits seems to be passing.

Lucas:

The last four facilities thathave sold in the Front Range did so at record high prices. Those properties were well-positioned, had great construction,and had good operating histories. Historically, investors and brokers assumedthe rental income would increase 2.5 percent to 3 percent per year. These arevery safe numbers to work with. Now, lenders and investors are hoping theproperty will hold its own and experience very moderate growth over the nextseveral years.

McVay:

Buyers are becoming moreselective due to the amount of overbuilding in certain pockets of SouthernCalifornia. Most areas of the market are not being overbuilt due to city zoningregulations. A buyer needs to talk to a qualified broker in the area to find out the best possible locations.

Michael L. McCune has been actively involved in commercialreal estate throughout the United States for more than 20 years. Since 1984, hehas been owner and president of Argus Real Estate Inc., a real estateconsulting, brokerage and development company based in Denver. In 1994, hecreated the Argus Self Storage Real Estate Network, now the nations largestnetwork of independent commercial real estate brokers dedicated to buying andselling self-storage facilities. For more information, call 800.55.STORE orvisit www.selfstorage.com.