The major institutions that provide market analysis on the commercial real estate (CRE) industry predicted earlier this year that CRE values would decline anywhere from 10 to 20 percent. They correctly predicted certain property types would feel the credit crisis more than others, but what do these types of market prognostications mean for self-storage values?
Combined with daily negative media coverage about broader Wall Street market conditions, these types of analytical reports can be enough to worry any investor. However, a closer look at the net effect of property value declines may ease some concerns.
First, the media’s tendency is to exaggerate issues such as CRE values. If you look closely at numbers used in media reports, you’ll see they are typically based upon a market’s peaks and troughs, which create wider perceptual swings for readers. But, everything is relative, so when hearing reports of widespread margins, keep in mind what those margins are relative to.
Two recent storage industry examples can help put this into perspective: the revival of the Detroit storage market and the downturn in South Florida.
Ups and Downs
For the past few years, the Michigan economy has experienced recessionary periods with loss of jobs, income and population. Storage performance in the Detroit area was at an all-time low and viewed as one of the worst performing markets in our industry. Recently, Detroit has been cited as one of the better performing markets for REITs in 2008.
As a second example, hurricanes ravaged communities in South Florida in 2005 and created instant demand for self-storage. Once area homes were rebuilt or renovated, storage tenants exited the market, which immediately decreased occupancy levels. With renters gone, the South Florida storage market became a hindrance for REIT performance.
In both of these examples, the reports were based on the peak and trough of each market. In Detroit’s case, the downturn was so significant that a bottom was reached. Now that the market is experiencing positive gains, the growth numbers become magnified and reflect a healthy market. In South Florida, occupancy levels hit all-time highs across the board immediately following the storms. But once the market returned to normalcy, the year-over-year decline was viewed negatively even though the market was back to pre-hurricane levels.