By example, capitalization (cap) rates, the way in which self-storage and other commercial real estate is valued, and interest rates are inexorably linked. If interest rates go up, cap rates will ultimately go up as well, and vice versa. However, due to various market conditions, the link between the two is somewhat flexible as to the timing and magnitude. Think about the relationship between the two rates as being tied together by a rubber band that allows it to expand and contract somewhat, but the overall relationship remains strong and closely related.
The current low interest-rate environment has allowed the market to reach equilibrium and created an almost perfect environment for anyone thinking of buying, selling or refinancing. I know that sounds like a broker talking, but consider the following: Buyers can buy a great property and achieve cash-on-cash returns not seen in many years. Sellers today, on the other hand, can get near the highest price per dollar of income in the history of self-storage. And if you’re considering refinancing, you can lock in an interest rate at the lowest rate in 50 years. The real question is: How long will this all last?
Second, self-storage values will most likely stay relatively the same in the coming year if the economy continues to improve. It’s anticipated we’ll experience a 10- to 25-basis-point compression in cap rates over the next year. This is largely due to the current interest-rate environment with most of this compression in cap rates being enjoyed by the B- and C-class properties as investors continue to chase yield. However, we just as easily could see a 10- to 25-basis-point expansion in cap rates if we were to experience an increase in interest rates after the election.
Lastly, a change in the U.S. tax structure could be devastating to the after-tax dollars a seller will receive when selling a self-storage property, and not because the properties will be producing any less income than the year before or the value of the property will be less than today. I’m not an accountant and do not give tax advice, but I believe it’s worth your time to check with your accountant to understand the impact of an increase in capital-gains tax on your after-tax proceeds.
Clearly, any of these events could have a material impact on a buyer’s or seller’s investment. My best advice is that if you’re in the market today, it’s time to seize the moment!
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 and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE; e-mail email@example.com .