This month, our roundtable of experts gathered to discuss self-storage in the South-Central States. The panel includes Allen Barnhill, Bill Barnhill, Shannon Barnhill Barnes and Stuart LaGroue, of Omega Properties Inc., representing Alabama, Mississippi and eastern Tennessee; Jon Cerruti, of Jack Stumpf & Associates, representing Louisiana; Richard Minker and Tyler Trahant, with Richard D. Minker Co., representing northern Texas; and John Owens, Westar Commercial Realty, representing western Texas. My comments are in italics.
Are sellers seeking reasonable market pricing and are there difficulties in locating qualified buyers at market prices?
A. Barnhill: Owners still expect higher market prices, most likely because of the past market conditions. We have to provide owners the best information available about the current market conditions and demand for self-storage facilities. From the buyer’s side, there are fewer qualified buyers seeking properties. We are seeing few first-time buyers; almost all of our potential buyers are experienced owner/operators who are being selective.
Cerruti: In Louisiana, sellers are looking for high prices. It is not difficult to find buyers if the properties are listed at market rates, but many sellers are not willing to adjust prices to meet the market.
Minker and Trahant: Many sellers have determined it may be a good time to sell for multiple reasons. In numerous cases, sellers are not putting their properties on the market with reasonable marketing prices or expectations. They want to base pricing on future performance or, if they are using existing versus projected income, they don’t take into consideration adjustments for tax increases or future operating expenses. They probably don’t even consider including a manager’s salary, because they may not pay themselves if they are self-employed. We are still finding qualified buyers in the market, but they are more sophisticated and won’t pay for non-existing income. They will make adjustments for more realistic operating expenses and are using cap rates to reflect current market conditions.
Owens: Market pricing is determined through a number of variables, particularly cap rates. There’s been a shift in cap rates over the past 12 months due to changes in the credit markets. An owner seriously considering selling a facility should have it analyzed by a storage broker and lender. The broker can tell what the facility is worth in today’s market and, more important, the lender will reveal to the owner if a sales goal is achievable.
Lower cap rates over the past couple of years have been attractive to buyers because they had the advantage of positive leverage, which allowed a higher cash-on-cash return than their cap rates. Recent changes in the credit markets have seen Treasury spreads rise up 75 to 100 basis points from a year ago, and amortization periods shrink from 30 years to 25 years, which has had an impact on positive leverage for investors. Despite the credit market changes, it is still an excellent time to sell, and there are buyers. Pricing is still around historical highs with many investors willing to expand their market presence.
Well-capitalized buyers are generally looking for bargains or distressed properties. However, they may be overlooking some great deals, because cap rates are currently at levels that will generate 12 percent cash-on-cash returns at current loan interest rates. But be careful: Interest rates may rise quickly and ruin this unique relationship that generates the returns. Sometimes greed gets false returns!
Is the bulk of financing from local banks or conduit lenders?
B. Barnhill: Local banks have been the primary sources for financing new construction as well as acquisitions for self-storage in our area, followed by some life company loans for acquisitions of existing, well-performing properties. I haven’t seen any conduit lending recently in this area, although I have seen a number of conduit assumptions.
Cerruti: Local banks and lenders are making up the majority of the financing in our area. Some life insurance companies are making low-leverage loans, say 65 percent, with excellent rates and terms, on good quality properties, if you are willing to take the low leverage. It is worth talking to a broker to learn more.
Minker and Trahant: Most financing is through local lenders, self-storage mortgage brokers and, in some instances, cash buyers.
Owens: I have seen more financing from local banks than conduit or life lenders. The recent drops in the discount rates have enabled local lenders to be more competitive than in years past.
Do facilities in your area have to use rent concessions or incentives to attract and keep customers? If so, what trends are you seeing?
Minker and Trahant: The Dallas-Fort Worth market is very competitive with a need for some discounting, especially in select submarkets. However, we have recently seen occupancy continue to increase with facilities being able to raise rates, so the need for significant discounting may be on the decline.
S. Barnes: Facilities in the Florida panhandle, Mobile and Baldwin counties in Alabama are using some incentives to attract customers. Although we usually see a substantial increase in rentals in the spring and summer, many facilities have been relying more on concessions and other creative marketing tools to get people in the door this year.
Overbuilding in some areas has caused many facility owners to offer discounted incentives. In most cases, nicer, well-located facilities have been able to use fewer discounts than those poorly located. Typical rental concessions in our market consist of one-half off the first month’s rent or the third month free. Most facilities offer a 10 percent discount for seniors and active military.
Owens: Storage facilities in our area have historically used rent concessions to attract the tenant but also to create tenant longevity.
Rental rates and occupancies are holding up well so far in this “non-recession,” but we are beginning to see softness in unsuspected places. The jury is still out.
What types of buyers are dominating purchases—large, multi-facility owners or smaller operators/new self-storage owners? Is this a change from years past?
Cerruti: The dominant Louisiana buyers are larger local operators. We have not seen as many national operators entering the market, but the local companies that understand the current conditions are looking to grow.
LaGroue: Presently, large multi-facility owners are purchasing more facilities than smaller operators, partly because of the availability of funds. In the absence of conduit loans, buyers requiring non-recourse loans are typically getting a lower loan-to-value of about 55 percent, thus making it necessary to raise more capital for equity. Most larger buyers have access to more readily available cash for a down payment or all-cash transactions. Small operators aren’t purchasing many properties because of stiffer underwriting requirements by lenders.
Minker and Trahant: We have few large national or regional players looking at the true A facilities in the market. Local buyers are looking at the B- and C-type properties. This isn’t different from the past, except that there are less A-type investors in the market. We have also seen a decline in inquiries from West Coast investors.
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.