In December, the Federal Reserve raised interest rates for the fifth time since June 30, when the Open Market Committee began a trend that would increase the federal funds rate—the interest rate at which banks needing overnight loans borrow surplus reserves from other banks—a quarter point at every scheduled meeting. This last increase put the rate at 2.25 percent, the highest it’s been in three years, and the committee is expected to raise it again on Feb. 2. In fact, Fed policymakers plan to keep elevating rates “at a measured pace” for the foreseeable future.
The boost is the central bank’s way of tightening credit after a period of historically low interest rates (this past summer saw the lowest in 46 years). In response, commercial banks aim to increase their prime lending rates, which will affect consumer and business loans alike—including those for self-storage. The point you’ll see many of this month’s writers driving home is ours is a real estate business. Therefore, the forces that steer its success are similar to those of other investment sectors: apartments, multifamily, retail, etc.
But there’s more behind the scenes than the cost of money. While the onset of storage development may be initially affected by the price and availability of land and funding, the long-term profitability of each project will be determined by tried and true foundations of real estate: location, due diligence, competition and, of course, customer service. With rates on the rise, individual facility performance has never been more critical.
Industry experts tell us that even with changes in interest rates, 2005 still appears rich for the purchase and sale of self-storage, though current owners may want to lock in low, fixed interest rates while the getting is good. Sellers can continue to build value into their facilities through sound business practices, and buyers can avoid losses by pursuing honest, thorough market and operational analyses before a purchase.
If you’re interested in learning more about the overall health of the self-storage market and the nuts and bolts of the business—including real estate basics such as site selection, feasibility and financing—consider attending the ISS Expo in Las Vegas, Feb. 23-25. You’ll have access to seminars on everything from “Getting Started in Self-Storage” and potential pitfalls of development, to insurance, legal issues and technology. In addition, you’ll meet hundreds of suppliers—brokers, lenders, designers, builders, marketers, retailers, trainers and many others—with the expertise you need to succeed.
In a time when policymakers strive to return the economy to “normal,” nothing is more dangerous for business owners than the status quo. Rate hikes mean storage operators must raise the bar to build and sustain value. So newcomers should invest in education and research, while seasoned operators secure themselves with service and vigilance. In all transactions of real estate, purchase or sale, take your time and do it right. To match the Fed’s “measured pace,” slow and steady will win this race.
See you on the show floor,
Teri L. Lanza