While the power struggle in Washington may have led to a temporarily prosperous time for investors, we must remember that one stroke of the pen can change everything. This, along with the unsettling vibes that are coming from several industrialized countries such as China, Great Britain, Greece and Spain should concern us all. It is my worry that in today’s globalized economy, countries like these may not take the necessary steps to head off financial disaster or report the issue honestly. This could have a tremendous trickle-down effect on the U.S. investment climate.
At the beginning of 2011, the 10- year T-Bill was bouncing between 2.5 percent and 3.4 percent, and it appears to be on the rise of late. The accompanying chart shows that over the last five to 10 years, interest rates have been very low when compared to historical rates over the last 40 years.
As a result, low rates have helped real estate investors capitalize on the booms and weather the downturns over the last decade. It is a concern that today’s interest rates are being kept artificially low by the fiscal policy being implemented by the Federal Reserve. If we were to see an increase in interest rates in the near term, we may experience a premature commercial real estate bust.
I believe we are experiencing a strengthening in the commercial real estate sector, and the fundamentals of self-storage seem to be following suit. Make no bones about it, if we enter into inflationary times, we will most likely see increasing interest rates that will have a major effect on the investment climate for self-storage properties. We would all welcome some controlled inflation, but as we have seen lately, controlling a globalized economy is difficult.
The biggest fear in the market today is that we will see hyperinflation, particularly as the ability to reverse courses is more difficult today than ever before. Contrary to popular belief, aggressively rising interest rates and highly inflationary times do not necessarily mean higher values.
Capitalize on Improvements
It’s important to realize that when you’re selling real estate, you’re actually selling the income stream that is valued using a cap rate, which is the inverse of interest rates. This means higher interest rates do not equate to higher values. As a result, you may want to re-evaluate your investment strategy in 2011.
Self-storage owners have the unique opportunity to capitalize on the recently improving real estate investment market, as values today are at the high end of historical averages. This will also allow you to avoid the fear of hyperinflation and whatever political problems this global economy may dish out.Ben Vestal is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self-storage buyers and sellers. For more information, call 800.55.STORE; e-mail firstname.lastname@example.org.