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Self-Storage Real Estate in the Western States: Experts Discuss Interest Rates, New Development

By Ben Vestal Comments

With lending back online, many are predicting an increase to the current low interest rates, which could have a significant impact on self-storage buyers and sellers. In this roundtable, real estate experts in the western states discuss new construction in their markets and offer advice to owners who are thinking about selling their facilities or refinancing existing loans. Participants include:

  • Steve Boldish, Oregon Self Storage Brokers, Medford, Ore.
  • Tom de Jong, Colliers International, San Jose, Calif.
  • Jeff Gorden, Eagle Commercial Realty Services, Phoenix
  • Joan Lucas, Joan Lucas Real Estate Services, Denver
  • Jason Wilcox, Raven Commercial Real Estate, Kent, Wash.

Unemployment is now at 7 percent and the Federal Reserve’s bond-buying program is in position to start tapering, which will most likely lead to higher interest rates. What should savvy self-storage owners be doing to ensure they’re well-positioned to succeed?

Boldish: Owners giving thought to selling in the near future, particularly those in second- and third-tier markets, should consider putting their property on the market in 2014. Rising interest rates and tighter federal lending guidelines will drain the buyer pool and lead to lower sales prices. First-tier markets remain strong, especially for larger facilities.

Gorden: Savvy property owners would do well to take stock of their plans for the entirety of the next real estate cycle. Long-term holders who use debt should secure it now for the long term while it is relatively low-cost. Development-minded investors would benefit by having their house in order and projects in the pipeline. Historically, as interest rates rise and lending becomes more profitable, there's more debt financing available, albeit at higher cost.

Wilcox: The most important thing is for investors to understand their leverage. With expected higher interest rates, owners and investors should look to hedge their interest-rate risk and rate lock.

With real estate prices now 2 percent to 4 percent higher than the last real estate boom (2007), how have buyers adjusted their underwriting? Should owners consider selling, refinancing or expanding their portfolio?

Boldish: Buyers are asking for past three year’s income and expense in addition to trailing 12 months. The days of selling on pro forma income are gone. Buyers are also seeking upside potential by scrutinizing a facility’s market rates and occupancy vs. their competition. When deciding to sell, refinance or expand, each owner needs to thoroughly examine his particular market.

de Jong: The dynamics are different in each market. The top markets in California have benefited from a huge imbalance of buyers to sellers driving pricing up to historical levels. The additional media coverage on the real estate investment trusts and the self-storage market in general have certainly helped contribute to the aggressive pricing we’ve seen.

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