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Self-Storage Real Estate Challenges: Pricing, Debt and the Market

Michael L. McCune Comments
Continued from page 1

The same general pricing rules apply to all commercial real estate, except revenue in other types of real estate is down much more than in self-storage. All in all, self-storage pricing is holding up better than other real estate categories. However, this isn’t much consolation to owners who have seen their value and equity decrease. The question is, will cap rates go back down? This is for you to decide, but in the last 60 years, they were never as low as they have been in recent years.

Old debt/new debt. The nice thing about “old debt” was that it was cheap, plentiful and easy to obtain. The problem is it eventually matures and sometimes prohibits a sale of the property until loan maturity, which limits owners’ flexibility. At the height of the commercial mortgage-backed security (CMBS) loans, money was inexpensive―sometimes as low as 4.5 percent to 5 percent―and no loan amount was too much. All it took was a call to just about any bank or mortgage broker. This happy confluence of circumstances caused many owners to over leverage (a polite way to say they borrowed too much) by getting too large of a loan for their property.  

Now, many owners are now locked into these loans for the duration of the term and can neither sell nor refinance their property. Unfortunately, given the current situation in the lending world, it’s unlikely that many of loans financed before 2008 could be totally refinanced today. The new lending standards would reflect the new valuation. The loan-to-value ratios have also declined from about 80-plus percent to 65 percent (on a good day), and interest rates have increased about 1.5 percent. Additionally, the amortization periods will likely be shorter, and there aren’t many interest-only loans. The lack of available loans is a serious problem for buyers as well, because in essence, the lenders are setting the maximum price.

The market. Self-storage buyers and sellers are deeply uncertain about the future. Of course, this is not the greatest scenario for agreeing on a price. Sellers don’t want to accept that property values are down because they believe their facility is still performing or will come back quickly. The buyers, who are almost all existing owners these days, think the market may go down further or are thinking they can drive a hard bargain.

In addition, the appraisers are not helping to identify the appropriate market cap rate or value―not because they don’t want to, but because comparable information on past sales is scarce and likely out of date. Information is also sparse because there have been so few deals in any one market over the last six months.

Clearly, all this is a problem not only for buyers and sellers, but for brokers who advise them in these difficult times. Sellers should first understand their reasons for selling. Is it simply fear, or do you have a personal reason (retirement, health, etc.)? Is it that you know your property is in a declining market? Is your debt more than the property is worth? When you answer these questions, you’ll have a better idea of what you should do.

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