Inside Self-Storage Magazine 09/2004: The Wild West

By Michael L. McCune

This month, I gathered real estate experts to discuss the state of self-storage in the West. Let’s hear what they have to say about their respective cities and regions. Our panel of brokers includes: Clifford Crowe, Lee & Associates, Carlsbad, Calif.; Larry Hayes, Hayes & Associates, Missoula, Mont.; Ron Largent, Coldwell Banker/C&C Properties, Redding, Calif.; Joan Lucas, Joan Lucas Real Estate Services, Denver; and Michael McVay, Lee & Associates, Carlsbad, Calif.

This is a great overview of current market conditions in the Western United States. All over the country, we are seeing a slight ripple beginning, which might be an early indicator interest rates are on the rise. While rates are still low, we encourage owners who have even the slightest thoughts about selling to take a closer, more serious look at the rewards the market can offer.

Crowe: A seller wants his property to be fully and accurately represented in its packaging, making sure the benefits and potential benefits, as well as all the obstacles, are communicated simply. He wants his property fully exposed to the market in hopes of a buying frenzy. Then he wants a good negotiator on his behalf, with the wisdom to generate a sound transaction—one that will close with little complication. The seller also needs to be sure his negotiator is obligated to him and not the purchaser.

Hayes: A seller should consider timing, for maximum price, and planning, to keep after-tax potential high.

Largent: I think this is influenced by the area, the market, etc. However, it seems to me that sellers are looking at two big factors: retirement and his personal situation.

Lucas: A seller should look at his property through a buyer’s eyes. What would he look for if he were going to purchase a property? First impressions really do count. Spend the money to paint the buildings and fix the asphalt, and make sure the property is clean and neat. Go through the books and bring all the late pays current. Tell your manager you are going to sell, but offer an incentive to work hard during the transition period to get more business in the door.

McVay: The most important thing a seller should keep in mind when deciding to sell would be to make sure he gets his property professionally packaged and marketed by a broker who will present the facility to as many qualified buyers as he can.

Crowe: In Southern California, the market is robust. There is a huge demand, but very little product. The cap rates have declined as much as two points in the last two years, yielding the highest prices ever. This is due to a lot of 1031 money in the marketplace as well as low interest rates.

Hayes: The high prices, because of low interest rates, being paid to sellers provide an excellent opportunity to exit the business at the peak valuation. It is assumed that prices will deteriorate when interest rates rise.

Largent: In three cases currently on the market, all the sellers are retiring. Why now? Because there seems to be a trend for apartment and other multifamily property owners to get out of the management of these investments, and self-storage looks very good. Financing is also good right now, and self-storage is pretty popular with lenders at this time.

Lucas: The market in Colorado has softened somewhat due to the economy and the fact that, in the last several years, many new facilities have come on stream. Most owners are offering incentives to get new tenants in the door—free boxes at move in, free use of moving truck and free rent. The well-run, newer properties continue to outshine those older ones in marginal locations. While one would expect buyers are more cautious in their underwriting of self-storage deals, investors still have strong expectations that the Denver market will rebound; and they continue to pay top dollar for well-located, newer facilities.

McVay: The market is great. There is a huge demand and very little supply. Thus, market conditions are benefiting sellers due to the low interest rates and the lack of product. Since there is a lack, a seller is able to get the maximum amount of money possible for his facility.

Crowe: The self-storage industry is attracting investors who previously have been in other product types. They recognize the industry has many advantages over other investments as well as a return that may be slightly higher. Those actively buying range from the single investor coming into the market for the first time to those who have been heavily invested in other types and are “changing horses.” Those who have multiple storage facilities are also actively trying to increase their portfolios as rapidly as they can.

Largent: It’s a good market, but not overwhelming. Quality properties with reasonable listing prices are getting a lot of action. There are many more buyers than sellers, as is typical in a good market. It is definitely a seller’s market in Northern and Central California.

Lucas: Unlike so many other sectors of commercial real estate, self-storage brokerage continues to be strong. Office, apartment and office/warehouse vacancies continue to be on the rise, while, as a whole, self-storage plugs along. We see and hear from newcomers almost on a daily basis. The deals being done in the Colorado market are by experienced, savvy buyers who are well-positioned to move quickly when they see a great opportunity, complete their due diligence, and close on the deal. Newcomers have a hard time comprehending that they have to move fast when they see a self-storage property for sale and there aren’t any “fire sale” properties available out here.

McVay: There are a lot of newcomers trying to break into the industry. It’s tough finding much product in the Southern California market for first-time buyers due to high prices and a lack of owners wanting to sell.

Crowe: I know the REITs would like to be active in this market, and they would be if there was more product. They are active behind the scenes, dealing mostly with portfolios.

Hayes: Currently, and in the recent past, I have not seen any activity from the REITs in Montana or Idaho.

Largent: Question No. 3 above applies here as well. Newcomers call almost daily, and the reasons are as we’ve all stated above. They are finding self-storage owners in their area do very well. Mainly, they see that two plus two makes an easy four.

Lucas: While all of the REITs have a strong presence along the Front Range of Colorado, only Shurgard has continued to build new facilities. Several years go, all of the REITs were very active, trying to build or buy; but again, due to the overall economy and surplus of units, that activity has slowed dramatically.

Crowe: I think everyone is price-conscious, but their consciousness is also tied to—and often limited to—the local market. Getting a good buy is always in the eye of the beholder. Is his investment going to give him the best yield and fit in with how he wants to operate? Many investors are savvy enough to recognize an investment is not just the cap rate but includes many other things, such as appreciation, lifestyle, etc.

Largent: It is very true in the California market, for a trend to buy whatever hits seems to be passing.

Lucas: The last four facilities that have sold in the Front Range did so at record high prices. Those properties were well-positioned, had great construction, and had good operating histories. Historically, investors and brokers assumed the rental income would increase 2.5 percent to 3 percent per year. These are very safe numbers to work with. Now, lenders and investors are hoping the property will hold its own and experience very moderate growth over the next several years.

McVay: Buyers are becoming more selective due to the amount of overbuilding in certain pockets of Southern California. Most areas of the market are not being overbuilt due to city zoning regulations. A buyer needs to talk to a qualified broker in the area to find out the best possible locations.

Michael L. McCune has been actively involved in commercial real estate throughout the United States for more than 20 years. Since 1984, he has been owner and president of Argus Real Estate Inc., a real estate consulting, brokerage and development company based in Denver. In 1994, he created the Argus Self Storage Real Estate Network, now the nation’s largest network of independent commercial real estate brokers dedicated to buying and selling self-storage facilities. For more information, call 800.55.STORE or visit www.selfstorage.com.