Self-Storage in the Western States: Real Estate Snapshot

Michael L. McCune Comments
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Hayes: Most of the older facilities have adequate equity and cash flow to ride out the short term. The newer leveraged facilities are experiencing difficulty in filling their facilities as quickly as intended, which is creating some tight times.

Laney: New Mexico storage owners are very locally sensitive and most have not changed their plans to sell their properties. Many have realized that a build-to-sell plan is a tougher situation now than it was a year ago. We have had very few owner defaults in the New Mexico market, which also mirrors the residential market foreclosure situation.

Lucas: In Colorado, we’ve had very few listings of higher quality projects in 2008. It is difficult for owners to realize that the values they saw in years past just aren’t supported by the market today. With a decline in values by as much as 7 to 10 percent over the last year, sellers are reluctant to leave that money on the table and are waiting for an upswing in the market again. Most owners are not making capital improvements at this time, but are waiting to see what happens with the market trends.

Layton: Most owners see today’s market as an opportunity to sell and get the last of the sub-8 percent cap rates before 2009 when capital gains taxes will increase. If the owner does not sell before 2009, he should take a hard look at the reasons for selling and possibly hold off until there is less uncertainty.

We currently have about as many self-storage properties listed for sale today as we had at the peak of the market. This indicates to us that for the most part the sellers continue to sell for personal reasons (retirement, moving, etc.) rather than fear of the market. Most sellers believe they still can make a handsome profit even though prices have declined somewhat, but they are meeting their personal goals by selling now. There are a few distressed sellers suffering from over-leveraging the properties or a slow lease-up of a new project.

Sellers are finding lenders now control both the pricing of a facility and the qualification of the buyers who need financing. How are your sellers reacting to this and what are they doing to make the property and deal more attractive? 

Arnold: Sellers may elect to bypass the lender and enter into a contract directly with the buyer. This will be at a reasonable interest rate for a period similar to what the lender might offer. It eliminates most of the details and expenses the buyer would have to endure if dealing with a lender, and may give the seller a break on his income taxes.

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