My take-home message from this: If there is evidence of potential inflation, the 10-year Treasury rate will rise and, if there is a liquidity problem in the credit markets, the spreads will also increase. What this means for you is that while loan rates are still low—by any historic measure (say 6.5 percent)—it might be a very good time to lock in financing for the long haul. These times appear to be very volatile and the future cost and availability of financing may be quite uncertain. Plus, you might sleep better with a loan locked in for 10 years!
The Market for Facilities
The uncertainly in the economy has also impacted the marketability of self-storage facilities. However, unlike the changes in finance availability, the changes have been more moderate and rational. Prices of facilities (per dollar of net operating income) hit absolute all-time highs in about mid-2007. Buyers would accept the validity of just about any projection and would finance the project to the maximum allowed.
The early 2008 market has seemed to find equilibrium at a level that is about 5 to 10 percent below the historic highs. The reality is many sales at higher values were made by investors with OPM (other people’s money), which may have meant they were not as discriminating as someone with experience in the business might have been. However, since the majority of self-storage projects are bought by current owners, the fact that prices have seemed to stabilize is a good sign that serious, experienced buyers recognize good value at the slightly lower prices.
The current market equilibrium may not prove to be very durable for the longer term for several reasons. For example, if the financing market becomes either less liquid or more expensive, the prices for a facility will fall. The math is simple: If you pay the lender more, you cannot pay the seller more, and if you put in a larger investment, you need a larger return.
Additionally, the current concern about a possible recession could cause potential buyers to be more concerned about future revenues. A 10 percent decline in revenue equates to a drop in value (at an 8 cap rate) of about 15 percent; if the property is leveraged at 75 percent of value, the equity would drop about 60 percent.
Clearly, any of these events could have a material impact on an owner’s investment if the investment horizon is short term, say less than three years. Thus, if you are planning to sell sometime in the not-too-distant future, you may want to give some thought to accelerating the process and putting your equity into T-bills.
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.STOR.