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The Commercial Self-Storage Real Estate Market: Decade in Review and Where Investors Go From Here

By Ben Vestal Comments

As we look back over the last 10 years, it’s encouraging to see cautious optimism present in today’s real estate market. Self-storage owners have seen their values begin to rebound, and buyers today are disciplined and patient as they seek opportunities that fit their criteria. The availability of self-storage properties appears to be due primarily to owners’ life events, as very few owners are making the decision to sell, instead wanting to capitalize on the improving market.

U.S. commercial real estate prices climbed 1.3 percent in October 2010 from the previous month, according to the Moody’s/REAL Commercial Property Price Index (CPPI). That’s encouraging for a market that has dealt with deflated property values for nearly three years. However, many experts debate whether the recent gains will last.

This improvement in values is small in relation to the overall 42.7 percent value decline the index has tracked since the market peaked in October 2007. In a year of index volatility, the CPPI logged six positive monthly gains and four monthly declines through the first 10 months of 2010. This leaves us with an aggregate gain of just 0.21 percent through October from the year prior. One may argue that the real estate market hasn’t fared much better. (The latest update to the CPPI was published by Moody's on Dec. 20 and computed through October 2010. See the accompanying graph.)

Moody's CPPI

Booms and Busts

As we look back on 2000-2010, we can recall experiencing two major booms and busts in the commercial real estate market. Who can forget the dot-com boom that came to an end around 2001-2002? We saw 20-somethings become millionaires overnight followed by the harsh reality that all good things must come to an end, including increasing real estate values.

Most recently, the real estate boom of 2004-2007 was the most prosperous time in commercial real estate history in terms of total transaction dollar volume. During the explosion, we saw savvy investors buying up anything they could get their hands on, with apparently no limit on what they were willing to pay. Interest rates were at rock-bottom historic lows, and there were herds of lenders willing to make very generous loans. This leads me to wonder what the next decade will hold and what factors will play a role in the next commercial real estate boom―and inevitably, the next real estate bust.

Government Effect

As we have now entered a new congressional session, we clearly have a political problem that will affect the ability of investors to make rational decisions and maximize their return on investment. In 2010, for example, we saw many owners trying to sell and take advantage of the historically low capital-gains tax rate that has now been extended for an additional two years. This is just one example of several such uncertainties that may affect investment decisions moving forward.

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