This month, I assembled a roundtable of real estate experts to discuss self-storage in the north-central states. I asked them to comment on their local markets and share their predictions for future performance. Joining us in this month’s discussion is:
- Bruce Bahrmasel, Landstar Realty Group, Chicago
- Robert Brehmer, NAI Daus, Cleveland
- Larry Goldman, RE/Max Best Associates, Kansas City, Kan.
- Chris Hitler, Investment Real Estate Specialists, Mequon, Wis.
- Sheldon Johnson, Johnson Group, St. Louis
1. The market has provided a unique dilemma for self-storage owners because cap rates are going up dramatically, which causes values to decrease and loan-to-value (LTV) ratios to increase. Are you seeing concern in your market about this problem, and how are owners solving it?
Bahrmasel: Self-storage owners in Illinois and Indiana are starting to understand the reality of the current market in which values can, and do, go down. One seller has significantly lowered his asking price and, as a result, a contract was generated from a buyer who had looked at the property several months earlier when it was priced about 12 percent higher. Another seller has agreed to carry a second mortgage to facilitate a transaction he never would have considered a year ago. A ready, willing and able buyer in this market is very tough to pass up.
Brehmer: Owners in Ohio are aware that cap rates are increasing in addition to LTV ratios. Some lament that they did not sell when the opportunity was there. I’ve been suggesting partial or total owner financing given the limited returns in alternative sources of investment. In the current economy, a seller could invest his proceeds with a bank or in a CD and earn a paltry but safe return, or he can provide the financing for the deal and earn a higher rate of return, which is secured by the borrower and the property.
Goldman: I’ve been involved in transactions where banks are replacing thinner, less experienced borrowers with more seasoned players, which leads to a consolidation of the industry. In some cases, while the banks do not control the properties, they are taking an active role in the negotiation of the sale. They tend to be win-win-win transactions: the sellers walk away whole; the lenders keep quality loans with stronger borrowers; and the buyers pick up great assets with terrific loans in an industry that is normally very difficult to buy into.
In other cases, sellers are more open to carrying paper than they have been in the past. Many buyers and lenders understand the storage industry is more desirable than retail and office properties in this economy.