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Self-Storage in the South-Central States: Real Estate Snapshot

Michael L. McCune Comments
Continued from page 2

Even if you do get an overpriced facility under contract, if the purchaser is borrowing from a bank, the appraisal has a very good chance of falling short of the contract price. To keep their relationships with banks, appraisers are being ultra conservative when evaluating properties.

Comiskey and Owens: If the market value of a facility is $35 per square foot and the facility is listed on the market for $50 per square foot, are you doing service to your facility? Probably not.

Grisanti and Helline: Overpricing a facility in this market is an exercise in futility. If you are intent on pricing at a 7 percent cap rate, wait until the market turns. If an owner insists on this high-selling price, he’s better off waiting for the market to catch up to him.

Keys: The main problem with overpricing a facility is that it will not sell. When the property doesn’t sell in reasonable period, buyers tend to stigmatize it, which may result in a lower sales price than could have been achieved if the property were priced appropriately for the market conditions.

Lehmbeck and Procter: Detriments include lack of activity on the property. Investors in Oklahoma are well aware of current property values. Sellers are holding the line on price, and buyers are buying on current cap rate.

Minker and Trahant: Overpricing impacts the overall sale of a property in several ways. Buyers have certain criteria they use before they even begin analyzing a property. One is cap rate. If a facility is priced too high (i.e., significantly below the buyer’s target cap rate), the buyer will not take time to analyze the property, and it will consequently be a lost opportunity for the seller.

Additionally, if the property is priced significantly above true value and remains on the market for a long time, buyers become wary of what the underlying issues may be with the property and are hesitant to evaluate the asset.
Have we reached the bottom of the market?

Barnhill: Typically, you can’t see a bottom until you’re past it. We’re looking for several indications that we’re past the bottom. First, overall occupancy rates and cash flows need to stabilize and improve to be more attractive for buyers.

Second is financing availability. We’re still in an environment where there are fewer financing options. That’s coupled with tighter, less attractive loan requirements. Finally, we’re finding buyers and investors still have greater risk aversion and higher return requirements.

Cerruti: There’s a natural cycle to the economy. In 2005 and 2006, we were on the top of the mountain. In 2007, we started to fall and, at the end of 2008, we entered the valley. It will probably take a few years to start climbing again.

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