Vestal: The self-storage real estate environment has been drastically affected over the last 12 to 18 months by the lack of liquidity (loan availability). Overall confidence declines in the market have pushed cap rates up 300 to 500 basis points over the last year, which has dramatically affected the value of self-storage facilities.
With that said, self-storage continues to outperform other commercial real estate assets. Revenue of the self-storage REITS are only down 5 percent to 10 percent through the first three quarters of 2009. This is far better than some other commercial real estate asset types. We have started to see a re-emergence of confidence from the buyers, and the spread between the asking price and what buyers are willing to pay seems to be narrowing.
Wilson: The demand for storage is not only being impacted by the worst recession since the great depression, it’s reflective of the level of supply this industry has been building over the past 30-plus years. In addition to weaker demand, owners who acquired facilities in the past couple of years are suffering the consequences of having purchased at the peak of the market; others are facing loans coming due, with limited prospects for refinancing.
The good news is even though owners are worried, self-storage facilities are outperforming all other types of real estate in this down market due, in part, to the uniqueness of storage demand. Unlike demand for other property types, the demand for storage is partly driven by the disruptions in peoples’ lives caused by things such as a job loss or home foreclosure.
There’s been a decline in self-storage real estate sales. What’s on the horizon?
Barry: It’s true that sales volume is off more than 50 percent from 2008 levels for all the reasons just discussed. We believe, given the existing federal, state and local budget deficits, future tax legislation will be less favorable in the coming years. Also, more than $40 billion of self-storage loans will be maturing in the next five years.
This heavy supply of loans to be refinanced in a tight lending environment will also not help valuations. We’ll see a greater number of motivated sellers, more properties on the market, and more closed transactions. There are buyers who have cash or can get financing on today’s terms, and they stand to benefit.
Chiswell: It doesn’t help, but we are not alone in terms of the lack of real estate lending, especially for new construction. Construction-lending hurdles have many prospective projects in moth balls waiting for a turnaround. It could be 2011 before the train is back on the tracks.
Kliebenstein: Until finance doors are opened and lenders start writing checks, there are few alternatives. If the stock market continues to improve and REITs can begin acquisitions, some properties will move. There are a few very solid, well-capitalized, high-equity firms still buying. Well-capitalized investors work with well-capitalized local banks to purchase smaller properties with strengthening capitalization rates
Loan modifications continue to allow workouts between borrowers and lenders to prevent short sales, bank-owned real estate dumping, distress sales and other value-killing, toxic loan and asset disposition. Once the distress sales have run their course and cap rates begin to strengthen as the result of normalized real estate sales, values will increase and lender confidence should return.
Once residential values return and stronger sales occur, people will begin to move, and that will boost the self-storage business, increasing occupancy and allowing supply and demand to function at “normal” levels, ultimately producing higher rental rates through yield-revenue management tools.
Vestal: Over the last three to six months, we’ve started to see some qualified buyers re-enter the market. We’ve also seen an increase in listing activity at prices more in line with today’s market. This doesn’t mean we’re back to the good old days of 2006-07 when cap rates were in the 6.5 percent to 7.5 percent range and pro formas meant something.
We’re seeing deals done on trailing 12-month net operating income, and there’s little value placed on vacant space and expansion land. We will start to see some increasing velocity in transactions over the next six to 12 months, but it will be more in line with the industry averages over the last 15 to 20 years.
Wilson: There are still many owners who have not come to terms with the fact that their facilities are worth less today. These owners are willing to sell if they can get yesterday’s prices, but they’re otherwise happy with the status quo if they cannot. Second, there are owners who have loans coming due and may be forced into selling in a down market. Thus far, most have been able to hold off the sale by obtaining loans extensions or renegotiating the terms of their loans.
The majority of today’s investors, on the other hand, have been sitting back and waiting for owners to either become realistic about values or be forced into selling at depressed prices. Thus, there’s a wide spread between the bid amount and the asking price, and there have been few transactions.