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Self-Storage Money Matters: Financing, Credit and Property Value

Michael L. McCune Comments
Continued from page 2

Evaluation Time

This is the section where, with the advice and opinions presented here and $3.75, you can get a latté at Starbucks. So, for what it is worth, I will try answering the looming questions:

  • How bad is it? I don’t think anyone knows, but the bad numbers keep getting bigger and coming from unexpected places. I’ve been in the real estate business 37 years and have seen three major downturns, and this is by far the most widespread problem yet. One measure of the problem so far might be what has happened to the self-storage REITs. For example, one year ago the stock of PSA was trading at $113 per share; today it’s $73. This is a stock with improved business fundamentals!
  • When will it be over? No one knows, but no one seriously thinks it will be over quickly. Other commercial real estate performance is probably going to get worse and housing prices may still go down more.
  • What do we do? If you don’t have a loan with a fixed interest rate and at least five or six years left on the term, refinance! Now!Get more term. Don’t wait! If you are thinking about selling in the next three years and maybe even five years, sell now! Cap rates will go up more (values down), if for no other reason than longer-term interest rates will go up as investors demand more return for their risk. Think about the value numbers in the first paragraph, but in reverse.

Make sure your property is competitive in your marketplace by comparing your facility to your competitors. Compare visibility, location, access, maintenance, employee quality, security, traffic counts and, of course, price.

Check at the city offices for new building permits or plan approvals in your market. Give very serious thoughts to the potential of overbuilding. If a new facility causes your occupancy to go down by just 5 percent and your rents to go down by 5 percent (including rent concessions), your equity (assuming a 75 percent loan) will decline between 50 percent and 60 percent.

So there you have it. Yes, there’s a new sheriff in town. He doesn’t appear to smile much and he packs a powerful punch. My advice to you is to stand tall and walk on the straight and narrow side ... at least for the time being.

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, a marketing medium for owners in the self-storage industry. For more information, call 800.55.STORE.

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