The end of 2013 is looming, and I'm confident the run-up in real estate values is not over yet. We've seen a 100-basis-point uptick in interest rates over the last six months, and shockingly, cap rates seem to still be coming in.
Please forgive my optimism, but I think real estate fundamentals are strong—especially self-storage fundamentals—and the increase in facility value owners have enjoyed seems to be strengthening. While many elements of the economy appear to be stabilizing, self-storage investor confidence also seems to be gaining momentum. This sounds like good news; and it is, for now.
Never before have prices been higher for self-storage properties, either in absolute dollars or in relation to the income they produce. This is all being driven by the lack of quality product on the market (simple supply and demand), newly found public awareness and continued low interest rates. However, it's worth noting that not every market is experiencing the same uptick in value or sales velocity.
This is largely due to the increased intelligence of the self-storage investment community. Today's investors are more focused on market-specific demand drivers such as the migration of population, population growth, barriers to entry, income growth levels and market-specific employment basis, just to name a few. They're more focused on where the market is going and not where it has been.
It would also be fair to say we have two distinct markets within the self-storage investment world—and I'm not talking about the top 50 metropolitan statistical areas and the rest of the country. I 'm talking about growth markets and non-growth markets. We've learned that small to mid-sized markets can be very productive investments if the demand drivers are present. This has been the case in markets like Aurora, Colo.; Austin, Texas; Greeley, Colo.; Raleigh, N.C.; and Williston, N.D. These markets have enjoyed strong rental velocity, rental-rate growth, population growth, income growth and, most important, growing self-storage demand.
Get While the Gettin's Good
But before you get too complacent with your new-found prosperity, there are a few dark clouds on the horizon. The first is interest rates may go up in a meaningful way. The Federal Reserve has certainly been trying to justify getting them up for close to a year now.
The second issue is overbuilding. You guessed it ... Development is back! The great returns have drawn a crowd. We're only in the beginning stages of the development cycle, but in the strong growth markets, we're seeing as much as 15 percent to 20 percent additional supply getting ready to come online. As we all know, development and potential overbuilding can have a drastic effect on a market.
An owner’s ability to properly evaluate future demand and the current market is the single most important thing in making the right investment decision. These are absolutely the best times in real estate for careful buyers and sellers. The prize will go to those who analyze their competitive situation and take action during this very unique time in the real estate cycle.
I really don’t know how this real estate run is going to turn out, but every one of my colleagues in commercial real estate has the same question: How long will this last? Remember, a meaningful rise in interest rates or overbuilding could eliminate your options moving forward, so now may be the time to act. Timing is everything in real estate, so talk with a self-storage specialist to help you determine if the time is right for you.
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 firstname.lastname@example.org; visit www.argus-selfstorage.com .