This month, I gathered real estate experts to discuss self-storage in the North-Central United States. Let’s hear what our local experts have to say about their respective cities and regions during these unique economic times.
Our panel includes: Bruce Bahrmasel, The Preferred Realty Group, Chicago; Larry Goldman, Prudential Commercial Real Estate, Kansas City, Mo.; Herb Head, Grisanti-Head Commercial Real Estate, Louisville, Ky.; Peter Hitler, Investment Real Estate Specialists, Milwaukee; and Robert Off, Coldwell Banker Commercial, Cincinnati. My comments are in italics.
We have it on good authority that cap rates are “ticking up” in several areas of the country. What’s happening to cap rates in your area?
Bahrmasel: Although cap rates vary greatly by project, it does seem that valuations similar to Walgreen’s are over.
Goldman: As there are still some great loan programs being offered by banks and non-bank lenders, cap rates have continued to stabilize for the time being.
Head: In Southern Indiana, it appears cap rates are holding steady and possibly trending lower. More buyers in the market are willing to pay higher prices for lower NOIs. I’m currently working on a deal where the buyer is seriously considering a 4 percent to 4.5 percent cap.
Hitler: Cap rates have “ticked up” because interest rates have gone up. Most banks are now quoting over 7 percent. Sellers are not lowering prices yet, so we’re seeing a slow down in sales at the moment.
Off: Cap rates seem to be rising. This is particularly true for non-prime properties. However, prime properties being marketed as a package seem to be holding their own.
While cap rates are generally in the same range, we’re seeing more and more instances where buyers aren’t accepting the aggressive projections on lease-up or rate increases, which amounts to the same thing as a cap-rate reduction.
We’re seeing many multifacility owners buying facilities. Are the big buyers dominating purchases in your market?
Bahrmasel: The tendency of current or former owners to buy projects continues especially now that 1031 mania is slowing.
Goldman: In smaller cities (populations of 500,000 or less) the market profile is still highly fragmented with no single owner owning more that a handful of facilities. In the larger markets, a few national buyers are trying to accumulate enough facilities to achieve the critical mass to spread out their marketing and operating expenses. It’s still difficult to acquire properties in those markets, as the larger owners are not selling, even with ever-increasing competition and lackluster performance.
Head: More and more of our activity comes directly from multi-facility owners. Economy of scale helps drive this effort, and I believe in the future we will see fewer facilities owned by a single owner/operator.
Hitler: Wisconsin is a market of many small-facility owners and few grade-A facilities. Most facilities don’t have onsite management, which discourages out-of-town buyers. We haven’t seen big buyers coming into this market.
Off: The larger buyers seem to be much more active in the marketplace. I think this is directly related to the increase in equity and debt-coverage ratios being demanded by banks tending to service smaller players. This has marginalized them as a result.
The overall demand for storage projects remains solid as more investors venture out of the main “food groups” of real estate: offices, hotels, apartments, industrial and retail. The foreclosure rate for self-storage is the lowest of any type of real estate and, therefore, is attractive to new investors.
Are banks or conduit lenders financing most purchases in your area?
Bahrmasel: Banks in our area have been very aggressive to make deals and there still seems to be a lot of money available. The major problem with conduit lenders is the often onerous pre-payment penalties.
Goldman: Most acquisitions are still financed through banks, although non-bank financing is gaining market share. Most borrowers understand that as interest rates are only going to go higher, they are locking onto some of the really compelling 10-year, fixed-rate programs. Those not planning to hold properties for the long term are focusing on selling in the short term to still take advantage of low rates.
Head: Banks tend to be the primary finance arm in our area.
Hitler: Since most of the sales in Wisconsin are under $2 million, most financing is by local banks.
The good news is there’s no shortage of money to buy a self-storage facility. The bad news is there’s also money (and a lot of it, too!) available to build new facilities. National data suggests rents are increasing and concessions are declining. Are your markets running against these averages?
Bahrmasel: As with cap rates, these vary greatly by project and usually reflect the amount of competition in an area.
Goldman: It appears that 2006 was a kinder year for the industry than 2005, with overall performance improving across most submarkets. The largest decline was in truck-rental income as high gas prices seem to have taken their toll on operators with truck-rental exposure.
Head: Rents are definitely trending up, with fewer concessions on facilities that offer more services, i.e., boxes, rental trucks, propane tanks, etc. Standalone facilities are cutting rents slightly to compete.
Hitler: We haven’t seen rents increasing to any degree. On the other hand, I think most facilities are showing good occupancy and are not giving away the store. Public Storage is still running a first-month-for-a-dollar promotion in our area.
Off: The Midwest is having difficulty in almost all realty sectors; self-storage is no exception. Only in rare cases are there positive movement in rents, occupancy and concessions.
Have you seen any significant overbuilding or proposed new facilities that might negatively impact local markets?
Bahrmasel: Yes! The word is out and more people are trying to develop new projects or do conversions. This is not necessarily in response to increased demand.
Goldman: New facilities are still diluting performance and slowing absorption for everyone, as they have in previous years.
Head: One large 50,000-square-foot facility just opened in our area a couple of weeks ago, but we’re not saturated like many U.S. markets. There are still good opportunities for developers.
Hitler: Overbuilding is a factor in a few areas. The biggest negative is many small owners are afraid to raise rates and, consequently, it makes it difficult for many owners to make a decent return on investments. I’m told that rates in the Fox River Valley haven’t increased in 10 years. Rates in the Milwaukee area have gone up slightly.
Off: Folks are still building and attending seminars. However, I think the pace of new construction has slowed considerably. Again, this may be more of a financing issue rather than a loss of appetite by those wishing to build.
Overbuilding is the “Achilles’ Heel” of self-storage; eternal vigilance for overbuilding is the only way to protect yourself. If sales taxes are approved in your area, watch out, because city planners will approve self-storage anywhere then!
Michael L. McCune is president of the Argus Self Storage Sales Network, a self-storage real estate brokerage and development company based in Denver. Argus also operates www.selfstorage.com , a marketing medium for owners in the self-storage industry. For more information, call 800.55.STORE.