Buying vs. Building Self-Storage: A Closer Look at Why Acquisitions Are Trumping New Development

By John Gilliland Comments
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For a couple of years now, REITs quickly dropped street rents in favor of higher occupancy levels until rents stabilized. They are now at or near the point where any small recovery in the economy could bring the rent increases they favor. The forecast is for small rent increases, but it will be some time before rents are back at peak levels.

Financing Challenges

Financing is scant for new development and tough for established self-storage veterans, while first-time developers have little chance of obtaining a construction loan. This doesn’t mean some markets are undersupplied or well-thought-out development projects are without merit. Steel prices are near all-time lows, and subcontractors across the board are looking for work and priced at bargain levels. Many vendors are doing work to break even so they can avoid layoffs and rehiring once business improves. Land cost is also inexpensive. Add in the time required to get a site fully approved for development and you might get lucky enough to open a new facility about the time economic prospects are improving.

When you add it up, total development cost may not be as cheap as buying a new facility, but overall costs are probably 20 percent below what they were a few years ago. Be fully prepared when seeking financing, and have an ironclad business plan, feasibility study and strong financial partners if you want to build today.

What It Means for Buyers

Buyers are in a wonderful position if they have cash on hand. At the onset of the recession, most decided to wait for prices to stop falling. This was the case for most of 2009 and the first half of 2010. As a result, they found few opportunities and sellers who were leery of bottom-fishers.

We also saw distressed properties where the bank’s first move was to offer interest-only payments to give owners more time to increase occupancy. This meant fewer deals on the market, fewer offers and a dramatic decrease in transaction volume. Volume improved in the latter part of 2010, and owners saw a greater number of offers and some stabilization in pricing.

Buyers are more active. Prices have stabilized. Many buyers are getting anxious to put money to work in an attractive market. Banks today are requiring 30 percent to 40 percent equity in acquisitions, so if you can find a good facility with the conservative financing that comes with it, you can have a solid investment for years to come.

John H. Gilliland is president of Investment Real Estate LLC, which provides full-service self-storage brokerage, management, construction and feasibility services for facilities in the mid-Atlantic and northeastern United States. He can be reached at 717.779.0804; e-mail jgilliland@irellc.com ; visit www.irellc.com .

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