Today we find ourselves in a unique position in the self-storage industry. Capital appreciation combined with strong fundamentals, increasing demand and continued low interest rates have made the traditional real estate transaction more accommodating, so both buyers and sellers can achieve their goals without hurting the other’s position. These positive economics don’t resolve all the differences that can occur, but given reasonable expectations and a measure of goodwill, the current transaction market will allow buyers and sellers to more quickly find common ground where they can both meet their objectives.
The looming interest-rate hike could cause the self-storage market to pause or possibly readjust, leaving many owners with an investment horizon that’s longer or shorter than planned. Below are some key points to consider when evaluating your short- and long-term goals.
I often hear from self-storage owners, “I’m not a seller, and I plan on holding this property forever.” Well, we all know things can change, and an investor may encounter circumstances that alter his investment horizon, such as health issues, new competition, a desire to live in a warmer climate, etc. However, if you do plan on holding the property for seven to 10 years or longer, here are some things to consider.
First, embrace technology and get your property up to speed with the latest in website design and functionality. This will ensure it stays competitive in its ability to attract new customers and allow you to expand your customer base by attracting tenants from a larger market area. Depending on your current situation, this technology upgrade will cost $3,000 to $8,000 upfront, and will come with a monthly service fee to ensure your website is optimized and easy to find.
Second, do everything you can to maximize your gross revenue. This means you need to focus on driving revenue through rate increases and additional revenue streams such as tenant insurance and ancillary sales. You also need to ensure your rates are in line with the market. Maximizing your revenue will allow you to absorb the inevitable ups and downs that all real estate investments experience over the long haul.
Finally, take advantage of the still low interest rates by locking in some long-term financing. That said, be leery of onerous prepayment penalties. Things can change, and you may want or need to sell. Prepayment penalties can really hurt the overall return on investment.
If you’re thinking about selling in the shorter term, say two to three years, look hard at overall market conditions. It’s crucial to understand the effect a change in capitalization (cap) rates would have on your value if they were to move up 100 to 250 basis points. You’ll also need to know how much you would need to increase your net operating income (NOI) to offset a rise in cap rates.
This simple sensitivity analysis can give you a good idea of the range of value. You can then weigh the risk and reward of staying in your investment for one, two or three years depending how much your NOI will grow over the next few years. Most owners will find the risk of missing the market today will outweigh the NOI growth over the next few years.
Also move forward with any capital-improvement projects such as asphalt repaving, roof repairs, or upgraded security and painting. This will ensure your property is in presentable condition when the time is right. These projects always seem to take longer to complete than expected, and if done right with a little marketing, it’s likely you’ll see a bump in revenue as well.
Take Advantage of Today’s Market
If you’re putting your facility on the market today, you have the good fortune of selling in an aggressive capital-appreciation market. The industry has experienced cap-rate compression across the board on all self-storage assets, leaving many owners in a positon to capitalize on a generational high value. However, keep in mind that the process of listing your property, marketing it, and closing takes at least 90 to 180 days. It can also be demanding on owners from the perspective of time, paperwork and reports.
As you prepare to capitalize on the market, make sure your property reports and profit-and-loss statements are clean and up to date. As always, make sure your facility is spotless and all components are in good working order. Consider having a broker tour your property and review your reports with you, as this will give you a second set of eyes and allow you to position the facility in the best possible light. Hopefully, this discussion has given you an understanding of the various factors to consider when evaluating your own investment horizon.
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. It also offers panel discussions in which brokers from around the country share their insights on self-storage market fundamentals and economic trends in their regions. To access recordings, visit www.argus-selfstorage.com/presentations.html and select a region. For more information, call 800.55.STORE; e-mail [email protected].