Self-Storage State of the Industry 2011: Real Estate

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Distressed Market

Single property owners typically have not put their storage facilities up for sale, Grossman says, unless they have compelling reasons to do so. Other than retirement, relocation or an offer too good to reject, single storage owners across the nation simply have had few positive reasons to seek a sale. Many properties are upside down, and owners have little leverage to refinance their loans.

“With values down 20 percent to 40 percent in some areas across the country, self-storage owners who are not pressed to sell are holding on and will wait for better times, which may be two to three years in some markets and up to five in others,” notes Bill Alter, self-storage specialist, Rein & Grossoehme Commercial Real Estate. “Even mature properties with loans coming due are facing problems. Lenders seem reluctant to take many of these properties back and are working to some degree with owners.”

Alter is among those who believe transaction volume will continue to increase in 2011, as many mature and distressed properties are expected to find their way to market. Lenders, he says, are poised to move away from the “extend and pretend” mindset in which banks work with borrowers to extend loans to give owners time for their markets to recover.

“Transaction volume has increased significantly in 2010 vs. 2009, and we have yet to really see the distressed or ‘toxic assets’ come to market from the lenders/special servicers,” agrees Nicholas Malagisi, national director of self-storage for Sperry Van Ness/Commercial Realty. “They are coming, but slowly.

“Owners who have loans coming due from placement five to seven years ago are going to be hard pressed to refinance without bringing new equity to meet the more strict underwriting standards of lenders today in regards to valuation,” he continues. “There are many other similar situations going to be coming due within the next 18 to 24 months across the country where selling will take precedence over refinancing.”

Grossman also agrees distressed properties will move more quickly in 2011. “The lenders and note holders have waited almost 18 months to decide how to handle the nonperforming assets,” he says. “Generally speaking, they’ve started foreclosure proceedings at a more fluid pace, and in turn, receivers are being inserted into the management of the asset. Once the properties are stabilized by the receiver and internal controls are in place, the property is put on the market at a discount.”

Cap Rates

Despite the volatility of the market, cap rates have held fairly steady, generally running in the range of 7.5 percent to 9 percent for class-A facilities, while class-B and -C facilities have ranged from 8.75 percent to 11 percent, depending on the situation and existing cash flow, according to Barry.

“For a quality, stabilized property, the cap rate now is probably 7.5 percent,” says Alter. “Older, first- or second-generation properties will trade for 50 to 100 basis points higher.”

Interestingly, in California, public real estate investment trusts (REITs) have exerted upward pressure on cap rates while nontraded, private REITs have done the opposite, says Grossman.

Determining value has become more problematic behind the influx of distressed properties. Appraisers and buyers are relying on the income capitalization method for valuation, rather than using comparable sales.

“Valuation utilizing comparable sales data is dangerous right now,” stresses Malagisi. “Because there have been so many sales of distressed assets still occurring, it would tend to lower the overall price-per-square-foot comparison to the detriment of stabilized facilities.”

“It is still unclear how to determine the value of properties built in 2006-07 that are less than 50 percent occupied,” notes Alter. “In many cases, those properties have little or no net operating income. In those situations cap rates and current income are meaningless. However, buyers like to say, ‘If it’s three years old, it’s stabilized.’”

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