Many sellers have determined that now is a good time to sell for both market and personal reasons. Are they seeking reasonable pricing, and are there difficulties in finding qualified buyers at market prices?
Blake: It’s never difficult to find buyers at market prices. The trouble we’re seeing in the upstate New York market is a lack of sellers willing to sell their properties at reasonable prices.
Cinelli: Sellers are still not realistic about market prices for their facilities. Only recently have we seen sellers start to listen to the market and what banks are saying about value. In our area, most buyers are serious and qualifying for loans is not an issue; qualifying properties is the problem.
Mendola: Sellers still want the highest value for their investment because they recognize that self-storage is getting more expensive and more difficult to build. It’s like looking at a stock like Google when it was $745 per share. Now that Google is under $700, the investor still wants the higher price for the stock. This is the same condition for sellers of self-storage. It’s difficult to get buyers to commit to properties where the price is higher than current market rates support. However, if the facility has high barriers to entry and is located in a growing area, it will still command the best price possible.
Shields: I tend to question how many “real sellers” are in the marketplace today. Some sellers are not ready for reality, to accept that values have dropped due to market conditions. They’re waiting for buyers who will pay yesterday’s prices and they’re willing to wait. I think they’ll have a long one. There are still buyers who want to buy self-storage, but there are fewer who can pass the lending scrutiny. The buyers who are strong and qualified have good banking relationships and are willing to wait for properly priced locations, at which time they will react.
Sellers always want yesterday’s price when markets are contracting; somehow the review mirror is easier to see than the windshield of the future. The reality is self-storage facility prices, even after a one-point adjustment in cap rates, are still at very near historically high values. Most commercial real estate cycles last in the range of three or four years, so it’s still a good time to consider selling.
The combination of any decline in revenues, because of overbuilding or a recession, plus an increase in cap rates can really impair values (a $1 drop in revenue reduces the value by $12.50.) The combination of declining revenue and increasing cap rates can be devastating to current values. If you think this can’t happen, you weren’t in the business in the 1980s.
Michael L. McCune is the president of Argus Self Storage Sales Network, a real estate brokerage and development company based in Denver. Argus also operates www.selfstorage.com, a marketing medium for industry owners. For more information, call 800.55.STORE.