Our roundtable of experts this month discusses the self-storage market in the North Central United States. Panel members are Bruce Bahrmasel of LandStar Realty Group, Chicago; Larry Goldman of Prudential Commercial Real Estate, Kansas City, Mo.; Peter Hitler of Investment Real Estate Specialists, Mequon, Wis.; Pat Jordan of Jordan Realty Inc., Minneapolis; Bob Randklev of Skogman Commercial Real Estate Group, Cedar Rapids, Iowa; and Dave Smith of Re/Max Commercial Midwest, Omaha, Neb.

How are buyers and sellers reacting to the current unsettled investment markets?

Bahrmasel: Buyers are waiting on the sidelines more than last year. The idea that they better act now before someone else gets it has been totally replaced with the notion to wait longer because prices may not have bottomed yet. Sellers have been less flexible in their attitudes to a changing market and still wish to price properties on lower cap rates than buyers will pay. Some have tried to maximize value by offering seller financing.

Goldman: They are concerned about tougher underwriting standards and rising long-term interest rates, as there is a smaller universe of lenders chasing their projects. Specifically, sellers are concerned about the diminishing value of their projects due to lower interest rates driving capitalization rates higher.

Hitler: They are very cautious. We have had several requests for storage valuations, which indicates owners are thinking about selling and planning their retirement. Buyers appear to be looking for under-valued facilities not currently on the market.

Jordan: Buyers are still shopping and sellers are reluctant to consider selling, believing inflation will raise property values, even if cap rates decline. A segment of buyers and sellers is waiting until after the presidential election before making financial decisions.

Randklev: We’ve had a very busy first half of 2008 but most of the activity has been in multi-family apartments. I don’t know that the buyers/sellers are overly concerned as rates are still low. Yes, the volatility has increased cap rates and reduced values, but many feel this is a market correction not something to fear. 

Smith: Basically, everyone is taking a wait-and-see attitude. Many owners are talking about building new facilities or expanding existing ones, but are waiting until after the elections to commit. There is much anxiety about capital gains taxes, and many owners are saying that, if they do sell, they will pay taxes at a known rate rather than defer to an unknown situation.

Any trends with facilities using rent concessions or incentives to attract and keep customers?

Bahrmasel: Facility owners in Illinois are more actively trying to attract new customers. Rent concessions and other offers, i.e., free trucks for move-ins or free first months, are being advertised in areas with significant competition. Still, owners have expressed the need to more aggressively monitor collections. 

Goldman: In Western Missouri and Kansas, the slowdown of new development due to stricter loan underwriting and sky-rocketing construction costs are boosting occupancies, and rent concessions are being reduced in those facilities. Other demand factors—such as the relocation of families that have lost homes, fewer people buying homes and other recession-driven issues—are boosting demand.

Jordan: I’m unable to determine significant changes regarding rent concessions, since demand for self-storage is more driven by life events than by business cycle. In Minneapolis, good, consistent marketing is more effective than rent concessions.

Hitler: The majority of owners at a recent Wisconsin Storage Association meeting thought business was good if not better than a year ago, and they had raised prices. This market has remained strong despite the economic downturn.

Randklev: Location still remains one of the most important factors as renters will be within 20 to 30 minutes of a facility. We are not seeing any rent concessions or incentives.

Smith: In Nebraska, we don’t have a lot of concessions driving self-storage rentals; it is pretty much business as usual.

Are the big buyers, multi-facility operators, dominating purchases in your market?

Bahrmasel: They seem to be the more active purchasers today. Perhaps this is because 1031 money has become nearly non-existent and, therefore, buyers who are migrating into the storage business from other areas of the real estate market have fallen off. Buyers now are trying to fit acquisitions into their plans rather than having to compete with market newcomers.

Goldman: While there is increasing consolidation among the multi-site owners, 1031 buyers trading out of other property types are still the most active.

Hitler: Wisconsin does not have many multi-facility owners based out of state. Buyers here may have more than one facility but are small in comparison to a national-based operation.

Jordan: The big buyers continue to dominate purchases in the Twin City and metro area markets.

Randklev: There haven’t been enough sales in our market to answer this question but we are a tier-six market, so there aren’t many big buyers to dominate.

Smith: When a facility is sold, it is generally to an owner who already owns a self-storage facility. Even in smaller markets, larger owners will look at property quite a distance from where they are already established. 

Is financing available from local banks or conduit lenders?

Bahrmasel: Local lenders have been the main source in the Illinois/Indiana markets. In some cases the larger banks either quit quoting on self-storage, or rates are not competitive. Conduit lending has seemingly dried up.

Goldman: Conduits are still on the sidelines and probably will be for at least another year. In the meantime, local banks are benefiting from their absence.

Hitler: I have not heard of any conduit lending in our area. Local banks are anxious to lend on storage facilities, but are careful in their criteria for approving the loan.

Jordan: In Minnesota, financing is primarily by local banks, but one banker I spoke with stated his firm would only lend to existing bank customers.

Smith: Local banks are still the source of funding for most purchases and construction.

Have credit problems impacted cap rates in your area?

Bahrmasel: When lending was freer, there were more available buyers searching to finance projects with cheap, highly leveraged funds. Cap rates have compressed, if not in tandem, at least closely following interest rates. While interest rates still remain low, tightening credit and underwriting standards have meant that projects need to generate more cash to get sold and need to be based on actual dollars produced rather than projections.

Goldman: Cap rates are still on the low side, but will most certainly rise. That uncertainty, coupled with the increasingly complex challenges of facility management, is driving some owners to consider selling.

Hitler: I think the economic slowdown has affected cap rates in Wisconsin. Since buyers are more cautious and lenders have raised rates, cap rates have to rise. Sellers have been slow to recognize prices have come down to some extent.

Jordan: I’m unable to determine the impact in Minnesota.

Randklev: Cap rates in Iowa have increased a little, but with rates staying low it keeps cap rates down. 

Smith: We have seen very little impact in Nebraska on cap rates thus far.

Michael L. McCune is president of the Argus Self Storage Sales Network, a self-storage real estate brokerage and development company based in Denver. Argus also operates www.selfstorage.com, a marketing medium for owners in the self-storage industry. For more information, call 800.55.STORE.