Exit Strategies

A good broker or investment adviser must have thorough knowledge of the submarket in which the property is located. He must know whether demographics are solid. Will the area continue to expand or retract? Is employment growth strong? Is the single-family-housing market healthy? What new construction is being developed? What does the future hold? What makes this a good location? Location is still king in self-storage.

As the market has started to shift from a seller’s market to a buyer’s, a number of investors in the Sun Belt and across the United States are acquiring self-storage assets at discounted prices, taking advantage of the market downturn. In many cities, occupancies have dropped as low as 70 percent, which opportunistic investors view as an excellent time to enter the market. These investors are betting market fundamentals will improve in five years, and occupancies should move closer to 90 percent, thus assuring strong profit.

In the more immediate future, asset focus will vary among investor types. Larger, cash-heavy buyers are expected to favor infill class-A space where construction costs make additions to supply of self-storage assets difficult. Specific attention will be paid to properties that offer amenities targeting frequent users, in areas that don’t rely on relocation-generated demand. Smaller buyers and investors, on the other hand, will target value-added opportunities priced well below replacement costs.

Looking ahead to 2008, private investors should thoroughly analyze each aspect of a facility’s operations when making acquisition decisions and planning their exit. The best time to make money on a property is when one acquires it, not when one sells it.

This market is clearly shifting from a seller’s market to a buyer’s carnival. The foolish money that entered the market eager to snap up all types of product—whether office, retail or self-storage—has left again. More sophisticated private investors and institutions, with strong balance sheets and the financial wherewithal to secure loans from non-conduit sources, have re-emerged to intelligently purchase real estate.

Where do you stand? More important, do you know your way out? Define your exit strategy and rest assured your financial future is in safekeeping. 

Michael Mele is a senior director in the Tampa, Fla., office of the Marcus & Millichap Real Estate Investment Services National Self-Storage Group. He can be reached at 813.387.4700 or mmele@marcusmillichap.com.