Cap rates have also changed during the last year, and new loan proceeds may not be sufficient to retire a maturing loan amount, which might require an owner to put up more equity. Because of low leverage applied by many self-storage owners, this may not impact as many in our industry as other commercial real estate; however, it will be a serious problem for those it does affect.
Cap rates in the beginning of the first quarter of 2009 went up dramatically, and quickly cut the theoretical value of all commercial real estate, including self-storage. Cap rates before the crash were significantly below the rates prevalent in the past 40 years (meaning higher values than in the past). However, because there were virtually no sales occurring, it was difficult to know exactly what the cap rates were in the early months of the downturn.
By looking at comparable sales and listings at the time, it appeared the asking cap rates were roughly 7.5 percent to 8.5 percent, and the offering cap rates were at 10.5 percent to 11 percent. Sellers were saying, “Would I earn a better return just holding my property?” and the buyers were just hopeful bottom fishers. The result was there were not enough sales to accurately define a real cap rate for several months in the first part of 2009.
The cap-rate spreads have now narrowed and are starting to stabilize in the self-storage market. We’re seeing transactions for well-occupied, well-maintained, demographically superior properties at 8 percent to 10.5 percent. There are a limited number of buyers, but inquiries from prospects are increasing to an encouraging level. Most sellers recognize that 2006 and 2007 were years of exuberance in the market, both as to price and ease of sale.
Buyers are equally tamed by their experience over the last several months and are becoming more realistic about pricing. There seems to be more rationality in the self-storage real estate market, and pricing appears to be approaching equilibrium. The demand for self-storage rentals seems to indicate the business is much less fragile than we feared, and the market for buying and selling will be more accommodating in the months to come.
Having made these predictions, here are three cautionary comments: First, if you have a loan maturing in the next year and a half, start planning to replace that loan now if you can. Much of the information in the financial press leads me to be concerned that the smaller banks will be restricted in commercial real estate loans because of their past over aggressive lending and pressure from the FDIC.
Second, now is the time to out-compete your competition by improving your property and marketing. A little money spent now when your competitors are holding back could improve your future competitive situation dramatically.
Finally, be conservative with your cash and watch for signs that the economy doesn’t go in reverse.
Michael L. McCune is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self-storage buyers and sellers and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE.