By Ben Vestal
In most markets, self-storage continues to improve as financing has become more readily available to existing operators and those looking to invest in the industry. In this "roundtable discussion," the following real estate experts discuss capitalization rates, rental rates and the availability of financing in their individual markets:
- Bruce Bahrmasel, Landstar Realty Group, Chicago
- Larry Goldman, RE/Max Best Associates, Overland Park, Kan.
- Chris Hitler, Investment Real Estate Specialists, Mequon, Wis.
- Jim Soltis, PreviewProperties.com, Brighton, Mich.
As there has been thin deal flow in many of the first-tier markets, are you seeing cap rates between first- and second-tier markets compressing?
Bahrmasel: The secondary and tertiary markets in Illinois and Indiana have not shown the same cap-rate compression as the class-A, first-tier properties. This presents a great buying opportunity for those properties, as investors can take advantage of historically low interest rates.
Goldman: In Kansas and Missouri, its difficult to classify cap-rate trends because most transactions in the past 12 months have been with underperforming facilities that are commanding low cap rates, based on actual trailing 12-month performance. The buyers are paying the low cap rates, as theyre confident in stabilizing the facilities performance.
Hitler: In Wisconsin, there has been virtually no transaction activity in the first-tier markets for a couple of years, so its difficult to comment on this type of property. Cap rates for second- and third-tier markets are in the 8 percent to 10 percent range. In general, cap rates havent changed too much. Whats different now vs. two years ago is deals are happening, and buyers and sellers are coming together on price.
Soltis: In Michigan, there appears to be a difference of about 1.5 points between first- and second- tier cap rates. There has not been a large number of transactions in recent months, so there isnt enough information to comment on whether this spread is compressing.
How is the local economy faring right now, and how has that affected self-storage rental rates?
Bahrmasel: While there has been no dramatic turnaround in the economy in the Chicago area, the fact that we didnt fall off the cliff seems to have quelled a lot of the fears that people had over the last few years. This has translated into rising prices, and storage operators seem to be more confident in their ability to raise rates. Most of the operators in our area have been able to raise their street rates over the last six months, which points to continued optimism in the market.
Goldman: In Kansas and Missouri, self-storage is coming back quicker than the housing market. Depending on which submarket, the fundamentals of the storage market improved a good 12 months before the housing market, which seemed to bottom out in the fourth quarter of 2011. Overall, concessions are being reduced and rates are increasing. Were seeing demand for storage increasing, and supply is constricted by the absence of new, ground-up developments. The fundamentals of the storage industry over the past 18 months have mostly been strong, with many facilities recovering from setbacks experienced in 2008 and 2009.
Hitler: In the near term, the economy has been strong enough to enable most storage owners to realize higher revenue this past year. Wisconsin tends not to experience the economic highs and lows as some other states. However, the state is at the epicenter of a very important debate over the funding of public employees benefits. It will be interesting to see whether the decision to put more responsibility on the individual will put Wisconsin on a faster growth trajectory than its peers.
As for the affect this has on self-storage, I recently completed a survey with more than 80 storage owners representing approximately 30 counties across the state. Sixty-nine percent responded that gross revenue was higher in 2011 than 2010. This a very positive sign for our industry.
Soltis: Some sectors in Michigan, such as healthcare and automotive, have shown recent growth. However, there isnt growth across the board, and theres apprehension about the potential changes in healthcare costs and excess government spending and over-regulation. The continued problems in the housing industry have had a positive affect on self-storage in the state, as rental rates have continued to increase over the past couple of years in the range of 3 percent to 5 percent per year.
Whats the status of financing for experienced self-storage buyers?
Bahrmasel: I recently met with a lender who was offering 4.25 percent rates with 20- to 25-year amortizations. These interest rates are at or near all-time lows. Investors have to be prepared to put 30 percent or more into a deal to get these great rates. If a buyer has less to put down, he might still be able to go the Small Business Administration (SBA) route, but these programs might be winding down, so its important to act quickly.
Goldman: Financing for seasoned operators is very compellinglow interest rates with reasonable underwriting. On smaller deals with local buyers, SBA lenders are starting to close some storage refinancing transactions and a few acquisitions. Focused, experienced operators have significant leverage, as there are excellent opportunities to reposition underperforming facilities.
Hitler: Financing opportunities are fantastic. Experienced buyers should be able to find financing below 5 percent for a five-year rate with a 25-year amortization. If a buyer is willing to trade off a lower down payment for a higher interest rate, he should be able to get an SBA loan requiring only 10 percent down. These are good times to invest in self-storage.
Soltis: Financing is definitely available for qualified borrowers. Were seeing more opportunities available at interest rates from .5 to 1 point lower than were available in the past 12 months.
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 protected].