It’s a great time to be a self-storage buyer, poised to take advantage of the highest returns we’ve seen in years. There are some good facilities on the market at low prices (in terms of cap rates), and many properties are being valued unrealistically. There are even a few properties that may be available from foreclosure. Let’s explore the current real estate market, when it will be the right time to buy self-storage, and the right steps to making a good purchase.
The reality is we haven’t seen this market fully unwind yet. The number of foreclosures in self-storage is very small. Lately, we’ve been working with banks and loan servicers on troubled assets and found that, for the most part, the number of problem loans is also relatively small. However, some of the REITs and larger partnerships are facing large loan expirations in the next few months.
In the past, the banker’s credo was, “Your first loss is your best loss,” meaning it was better to foreclose than to wait for a property’s value to further decline. In this early stage of the game, it appears banks and commercial mortgage-backed security servicers may be willing to make significant concessions to avoid foreclosure, keeping them from writing off the loan and recording the loss on their books.
Thus, it’s not yet clear if the foreclosure mode will produce good buys in the immediate future. The banks are unsure of values, or they may believe the government’s Troubled Assets Relief Program may be a better buyer in the end.
There are a number of sellers in the market right now. Not unlike the banks, many of them are holding out for high prices that don’t reflect the market. These sellers may be relying on old appraisals from 2007 or thinking the listing price is as low as they’ll go. Some, however, may be desperate to sell, forcing flexibility. That said, a tortuous negotiation may be at hand where the asking and sale price are determined.
For buyers to be effective in a market as unsettled as this one, they should think about the listed property they would like to own. Try to buy quality properties, not just those that are cheap. Whatever criteria you use to assess value (location, type of construction, demographics, excess land, etc.), stick to them when evaluating properties. This keeps you from buying something you don’t really want.