This year has been marked by the political “rock and roll” of the election season, and it’s difficult to predict what the rest of the year or 2013 will bring. No matter which side of the aisle you sit on, if you consider the debt levels on which the U.S. economy is embarking with no debt-reduction plan in place, it’s obvious we’re moving quickly into uncharted waters. It’s also important to mention that Congress has received warnings in regard to the U.S. credit rating from groups such as Moody’s.
In light of the turmoil and uncertainty our country is facing, I’ll give you some thoughts on the self-storage real estate market that will hopefully provide some perspective for self-storage owners to consider.
The Market for Self-Storage Properties Today
The uncertainty of the economy, political leadership, interest rates and the current U.S. tax structure have had an impact (positive or negative) on the marketability of self-storage properties around the county, depending on your current situation. However, unlike the macro issues mentioned above, the adjustments to self-storage values have been more moderate and rational.
Self-storage facility prices per dollar of net operating income hit an absolute all-time high in about mid-2007. Buyers at that time would accept the validity of just about any projection and finance the project to the maximum allowed. The 2012 market has seemingly found equilibrium at levels that are 5 percent to 15 percent below the historic highs, although the spread between the top 10 metropolitan statistical areas (MSAs) and the rest of the country is greater than that of the 2007 market. This has created opportunities for the entrepreneur who can operate in smaller markets with a lower expense structure, employ more hands-on marketing, and use today’s technology to minimize the expense load.
The reality is most of the large deals done in major markets today are by investors and institutions with OPM (other people’s money). These institutional-type investors have access to less expensive capital than the entrepreneurial investor, and they don't look at acquisitions in the same way. For example, they don't evaluate an investment for protection of a current asset, protecting or gaining market share, the desire to enter certain markets, or the opportunity cost of putting or not putting the money to work today. All of this has led to a fluid transaction market where deals are being done in large and small markets nationwide.
What's the Big Question?
The real question is, what do interest rates, improvement in the economy and a change in the U.S. tax structure mean for self-storage owners and their property values? In other words, how do changes in the macro economy and the credit markets impact the value of self-storage properties and the owners’ flexibility?