To say 2009 was a rough year for businesses is an understatement. While some self-storage operators did well during the past 18 months due to changes in the lives of consumers, most still felt the fallout of the recession. Lower occupancy rates, abandoned units, higher unit turnover and concessions became the norm for many.
Yet self-storage fared better than most commercial real estate, particularly hotels and office complexes. In fact, the four real estate investment trusts, often considered a barometer for the industry as a whole, reported better than expected third-quarter operating results.
Now, everyone is looking at 2010 to be the turnaround year. New construction will likely remain slow, and facilities will need to aggressively market themselves to stay on top. However, many operators and other professionals have a positive outlook.
In this three-part series, Inside Self-Storage asked experts in industry real estate, finance, development, management and marketing for their insight to today’s market. Part 1 delves into real estate, examining how the economy has impacted the buying and selling of self-storage properties, trends in cap rates, and what’s on the horizon. Our experts are:
- John Barry, vice president of brokerage, Investment Real Estate LLC
- Jim Chiswell, owner, Chiswell & Associates LLC
- RK Kliebenstein, president, Coast-To-Coast Storage
- Ben Vestal, executive vice president, Argus Self-Storage Sales Network
- Ray Wilson, president, Self-Storage Data Services Inc.
What’s the state of today’s self-storage real estate environment?
Barry: We’re seeing more owners who considered selling their facilities decide to retain them, unless they have a need to sell. Owners feel they’re not getting the value they believe their property is worth. Two often repeated themes are they want to see where the economy is heading and what policies are proposed or passed by the new administration and Congress.
Chiswell: The answer depends on your perspective. If you have a loan coming due and can only get a 60 percent loan-to-value mortgage—coupled with a low-ball appraisal—things look bleak. You realize you can’t sell it quickly for what you feel it’s really worth.
On the flip side, some facilities are still operating at 85 percent physical occupancy. Operators have given up some pricing power in increasing rents, and many are involved in heavy discounting to keep renting units. I’m not sure just how long it will take for our industry to regain that price elasticity in many communities.
Kliebenstein: We have several factors affecting our industry: a weak economy that’s generating lower occupancy and declining rental revenues; reduced consumer confidence that translates into reduced discretionary spending, where often storage is seen as an unnecessary expense and eliminated; and a greater than ever number of properties in the market competing for fewer tenants.
Some good news: The willingness of lenders to work with borrowers on loan modifications to salvage ownership or transfer of ownership, and real estate investment trusts are able to raise capital and show returns through improved operations, such as expense control, debt restructuring, stock buy backs, etc.