The Self-Storage Industry’s Extraordinary Times: How Long Will They Last?

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A Perfect Environment?

Maybe the most important indicator of where the market is headed is investor confidence. According to PricewaterhouseCoopers’ first-quarter 2011 real estate survey, it’s on the rise. The improvement in the national economy has translated into increased investor confidence and commercial real estate fundamentals in general.

The real question is whether this will continue and how long the recovery will last. The current low-interest-rate environment and investor confidence has created an almost perfect environment for anyone thinking about buying, selling or refinancing. I know that this sounds like a broker talking, but let’s see if you agree:

  • Buying: Buyers today can purchase good properties and achieve cash-on-cash returns not seen in last few years because of low interest rates. They also have the strategic advantage of understanding how a property has performed during the worst downturn in the last 40 years.
  • Selling: Sellers can enjoy near historically high prices, which are also being fueled by the low interest rates and increased investor confidence, all while enjoying some of the lowest capital-gains taxes in history.
  • Refinancing: After the last few years, if an owner does not understand the importance of locking in a loan at a low interest rate for as long as possible, he needs more help than a new loan.

With these thoughts in mind, the next logical question is whether this improvement will continue and at what pace. Pursuant to the liquidity crisis of 2008 and the subsequent quantitative easing programs by the Federal Reserve, investors have become increasingly concerned about the prospect of inflation, particularly in light of the rapid rise in oil and global food prices. The question, of course, is when to jump into action.

Since we have discovered the dramatic impact of interest rates, it might be helpful to review their history. The accompanying chart shows the 48-year history of U.S. 10-year Treasury bonds. Interest rates on these bonds, plus a “spread,” are most often used to set the pricing on self-storage loans. The spread has ranged in the last 20 years from 1.15 percent to 5 percent, so a graph of self-storage loans would be even more exaggerated in its swings. As a general rule, all spreads increase as interest rates increase and money tightens.

 

As you can see, interest rates can be very volatile, changing as much as 2 percent to 4 percent in just a few years. Following are a few observations. Give some thought to whether the risk of inaction outweighs the probability of improving your position through lower interest rates.

  • There have only been five years out of the last 49 when the 10-year Treasury bonds have been consistently below 4 percent: 1963, 2008, 2009, 2010 and now 2011.
  • In addition, rates over the last 49 years were 3.5 times as likely to be in the 6 percent to 8 percent range as where they are today and equally likely to be in the 12 percent to 14 percent range.
  • A 2 percent increase in the interest rate on a normal loan (6 percent, 25-year amortization) has the same impact on cash flow after debt service as raising your operating cost 23 percent.

These extraordinary times have created opportunity if you are considering buying, selling or refinancing. It all comes down to your objectives and the actions you must take to reach them. Now is a great time to make a move. If not now, when? 

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 bvestal@argus-realestate.com.

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