Much has changed in our economy and financial market in the past year. While there were some positive developments over the past 12 months, bad news still lingers on many fronts. The “other shoe” is now dropping: commercial real estate. Declining property values, coupled with limited access and viability of debt, are contributing to the nation’s new financial break point.
In tennis, a break point occurs when you’re one point away from losing the game, even though you’re serving the ball. Outside the court, a break point can refer to how individuals handle a situation at a critical point.
These days, self-storage owners and investors try to maintain their “serve” by closely managing their businesses to minimize decreases in occupancy that, in many cases, is coupled with lower rental rates. Few property owners are immune to the drastic changes in commercial real estate value and available leverage experienced in the past year. Consider:
- Relatively few storage sales transpired in 2009, and construction starts are now at a 10-year low.
- Financial markets came close to a grinding halt, perhaps more aptly termed a “rolling stop.” Only what lenders deemed to be the best deals seemed to cross the finish line.
- Most of us saw the largest property-value decreases in the shortest time period in our lifetimes.
- Across all property types, cap rates increased approximately 200 basis points.
- There are no signs of any positive value adjustments in sight.
Welcome to a New Year
Self-storage owners should now strategize their equity positions to best maximize their return on investment. In many cases, this is far from a clear-cut analysis. Begin by realistically examining the property’s current value. While you may be shocked by its lower-than-expected valuation, this is your starting point.
Next, if you determine a need to finance in the next 24 months, consider whether you have enough equity to obtain financing without putting up additional proceeds. If you’re facing a potential sale, a current valuation helps you address various “what if” scenarios.
When examining these situations, analyze future risks vs. rewards. You might be well-positioned to ride out this economic cycle for several years. On the other hand, the only practical solution may be to sell the property or even return it to the bank.
The need to leverage or finance in the 2010 to 2011 time period will be critical in determining your path to protect your storage investment. This analysis will help you in choosing the best route.
Following are my predictions for the new year: