In addition, Beacon Principal Neal Gussis and SIA Managing Director Aaron Swerdlin offered their real estate investment and financing outlook for 2008. Reflecting a cautious optimism for the market, their key observations and predictions are:
Self-storage operating performance should remain strong in 2008.
Capital-market struggles will continue to affect transaction velocity in 2008, with single-property transactions and transactions priced at less than $15 million being the most impacted.
Large, institutional transactions will still have strong velocity and volume because the buyers in this market segment are better capitalized and much less dependent on the collateralized debt obligation and commercial mortgage-backed security debt markets. Further, overall market conditions have forced a flight to quality that has added buoyancy to larger portfolio transactions.
There is no shortage of equity capital for the self-storage market, as well as ample capital from the debt side. However, many borrowers in early 2008 still want to use spring 2007 as the benchmark; relative to that point in time, today’s loan terms are not competitive. Nevertheless, when compared to more stable time periods, what is available in today’s debt market is competitive. The reality is the days of 85 percent to 90 percent acquisition debt are past, and self-storage property owners and investors should expect more conventional terms in the 70 percent to 80 percent range.
Sellers struggle with the reality that overall property sales prices have decreased 3 percent to 8 percent nationwide, while their net operating income has increased 3 percent to 5 percent. Because operations have been relatively steady, we don't expect sellers in 2008 to meet the market halfway relative to the softening of values. We've seen a number of owners who were sellers in 2007 revert to focusing as mid- to long-term operators.
Further softening in the economy and declining interest rates will keep cap rates from increasing substantially in 2008. Even with higher equity requirements, the returns available in real estate are 60 percent to 100 percent higher than what is available in lower-risk investments, such as bonds and certificates of deposit. With these higher return levels, self-storage real estate investors will continue to be willing to assume this added risk.
The retreat in swaps and compression in Treasury-bill rates are now resulting in CMBS quotes below 6.5 percent.
Underwriting standards for debt will stay on the conservative side in 2008 compared to terms offered for similar transactions in 2007.
Headquartered in Chicago, Beacon is a commercial real estate financial services company that arranges debt and equity financing for new and existing projects, advises on the acquisition and disposition of real estate assets, and provides commercial loan servicing for correspondents. For information, visit www.beaconrealtycapital.com.
Founded in 2006 and based in Houston, SIA manages self-storage property dispositions, acquisitions and capital-market executions/financing on behalf of institutional and private capital clients. The company’s team has bought, sold, brokered and financed more than $1.3 billion in self-storage real estate. For details, visit www.siallp.com.