Real Estate Stalls
The unstable financial market has also greatly affected the commercial real estate market. The real estate investment trust (REIT) market was poised for big losses in 2008. The industrial sector was down 81.11 percent, lodging and resorts 66.57 percent, and regional shipping malls 66.34 percent, according to the Association of Real Estate Investment Trusts. In comparison, the self-storage industry performed the best: dropping only 14.59 percent last year.
Although self-storage fared better than many other types of commercial real estate, there has been a slowdown in acquisitions. “Deals are still being done, but not at the same pace as before,” Wilson says. In addition, properties are sitting on the market longer. “Values are now down at least 20 percent and I won’t mention equity erosion—all this without changes in net operating income,” says Michael McCune, president of the Argus Self-Storage Sales Network, Aurora, Colo. The average property value is down 20 to 25 percent, predicts McCune. “The net result is that buyers can’t find loans that work at the 2007 values.”
In addition, many sellers have unrealistic expectations based on a “precedent set by a few buyers in the market that spent acquisition money like drunken sailors, without exercising proper due diligence, or in some cases, common sense,” says RK Kliebenstein, owner of Coast-to-Coast Storage, Atlantis, Fla. “When those deals go sour—and they will—that will make it tough for others to get easy access to financing.”
Falling equity has also has led to a large spread between the “bid” and the “asking price,” Wilson notes. “But that will change when many of the investors who entered the market most recently realize they are locked into a low-yielding investment with little upside, and they decide to cut their losses when their loans start coming due,” Wilson says.
For those looking to purchase an existing facility, due diligence is the key to ensuring it’s the right investment. “An investor must do a serious, professional demand study,” McCune says. “Know all the details of every competitor within five miles and compare them to the proposed purchase, understand the property and be aware of the cap rates in the area.”
Without a crystal ball, it’s impossible to predict what the future holds for the self-storage industry in the coming months. As the U.S. government attempts to untangle the housing mess and financial crisis, many self-storage owners, developers and investors are left on the sidelines ... waiting. “Owners and investors alike need to understand that the capital markets look completely different than they have over the last few years and may continue to get worse before it gets better,” Tran warns.
That means fewer loans with tighter restrictions, which could leave some industry people out in the cold. “The developers with good credit, strong net worth and income, and that have a track record in self-storage will have access to capital; others will not find it so easy,” Kliebenstein says. “Projects are going to have to stand on their own merit. Gone for a while are the ‘lend on blue sky’ days.” Kliebenstein also believes occupancy levels will continue to slide, and rate increases will be nominal until the real estate market returns to a healthy state.
Essentially, expect rougher waters ahead, Smyle says. “Most of the financing will be done by local and regional banks but expect tighter underwriting, higher down payments on purchases, more scrutiny and seasoning on cash out, more emphasis on borrower financial strength and income, and higher rates than seen in previous years on fixed-rate product.”
However, the slowdown in new facility construction and tighter loan conditions could have a silver lining for self-storage owners in crowded markets. “It’s simple math,” McCune says. “Self-storage space is growing at a faster pace than the population.” With national average occupancies hovering around 80 percent, the industry, for the most part, is meeting the demand, he says. “You must always watch out for overbuilding in your market, it is the Achilles’ heel of self-storage when demand is even somewhat limited.”
While there is still uncertainty about the economy and what the future holds, most people in the industry remain positive about the future of self-storage and the integral role it plays in American society. “The storage industry has proven its long-term viability by attracting a large and diverse base of customers,” Gussis says. “It will be the self-storage community’s job to continue to capture and fulfill their needs with outstanding products that are priced appropriately given current market conditions.”