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An Open Letter: Self-Storage Real Estate in This Economy

Michael L. McCune Comments

I am writing this letter to give you my unvarnished thoughts on today’s real estate market and what I believe to be a self-storage owner’s options. These options are difficult and limited because the market is also unusually tricky.

I got into the real estate business in 1971 and have been, for the most part, happily and profitably engaged for some 37 years. Of course, there were periods of credit crunches, high interest rates, three serious recessions, savings-and-loan debacles, overbuilding and a significant period of very high inflation. Each one of these difficult times ultimately ended with a resolution, but not without some personal pain and, in the case of some of my real estate colleagues, serious negative consequences. 

As 2007 ended, I began to think there was something quite different about this “slowdown.” It occurred to me that the real estate market that had preceded the now-accelerating decline was dramatically out of line with any previous market. This boom of excesses was beyond the scope and magnitude of anything I had seen in the past. Prices were at record highs both nominally, and more disturbing, in relation to the incomes of the properties (i.e., extremely low cap rates).

Likewise, every property type was involved in this bubble. Exacerbating the problem was that usual financial underwriting standards were simply discarded and loan amounts were ridiculously generous; interest rates were low and often recourse was not required. The recovery would be more difficult this time because there were more causes of the problem. While my experience told me that, as usual, everything would work out with a little time, my instincts were much less sanguine. My instincts are now proving to have been more accurate.
The Real McCoy

This period of contraction, either directly caused or materially aggravated by the excesses of the entire real estate market, has resulted in the worst economic situation in living memory. This is the Real Mccoy! It's also clear that in the end, the fortunes of real estate will bear an outsized portion of the destruction of wealth because of the continued decline of real estate values (rising cap rates) and the lack of liquidity in the financial markets. Given the magnitude and diversity of this problem, it will not be solved quickly―in years, not months! Unfortunately, I am not alone in this assessment, but I do sincerely hope I am wrong.

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