During the past six months, I’ve talked with countless owners who’ve seen occupancy rates drop to the lowest levels in years. “Are we at the end of the Great Self-Storage Run?” they ask. “Is the end in sight? Will we ever recover?” My answers have been an unwavering, “No ... no ... yes.”
While I admit to being optimistic, I don’t think my positive outlook of our industry’s future is unrealistic, but owners’ expectations must be brought in line with reality. Many of us have enjoyed above 90 percent occupancies with 4 percent to 7 percent annual increases for years. My guess is those days are over.
A realistic budgetary forecast of 80 percent to 85 percent will be more achievable. A 2 percent to 4 percent increase would be wonderful, but consider anything over that a gift from the storage gods. Some owners/operators may discover that, once discount patterns are considered, the average rental rate per square foot is less than expected. So don’t ignore the giveaways.
Are there markets that are overbuilt? Of course! Are there some facilities that should never have been built? Absolutely. Have some buyers created artificial expectations of real cap rates? You bet. I have started to see signs that with tightening mortgage underwriting and more realistic closing prices on some transitions, most excesses will leave the market replaced by more normal levels.
The bottom line is we invested in a business that has paid us an amazing return over the past several decades. The fact that those returns may now have been downgraded to great or substantial is certainly no reason to become Chicken Little.
The biggest problem many owners will be facing in the next five to seven years is estate planning. Maximizing the aftertax net financial gain on this business for children, grandchildren or an estate trust can be daunting. With millions of dollars in tax-deferred processes from refinancing and the creative accounting some owners have employed over the years, sorting out future tax liabilities and using all the twists and turns of the current tax code will keep many people up nights for years to come. The recent congressional action on “carried interest” is just a harbinger of what could be ahead for small-business people.