Looking back at the first nine months of 2012, theres no doubt the real estate transaction market has improved significantly, and with it, the pressure to overprice properties has increased. This is due primarily to the two most critical factors that affect a fluid transaction market: the ability to finance an acquisition, and the buyers and sellers perception of fear or greed in the market.
With more than 50,000 self-storage properties around the country, theres bound to be an owner whos contemplating parting with his beloved facility on a daily basis. However, weve learned theres a material difference between thinking about selling and becoming an actual seller. Eventually, almost everyone will end up being a seller; its a matter of when that concerns most owners. Thinking through the following factors will help you determine how close you are to becoming a real seller, which will help maximize your investments return.
Retirement, estate planning, partnership problems, liquidity and divorce are just a few things that make owning an investment property difficult. Experience has shown the vast majority of self-storage sales are a result of a personal issue and not what real estate brokers would consider a market-driven issuea sale that takes advantage of the market conditions or concern for the future market. This proclivity to make the final decision based on personal issues is entirely appropriate, but with a little planning and forward thinking about the current market, a small adjustment in the timing of a sale (one to two years) can be very rewarding.
Another factor affecting the decision to sell is increased competition, or even future competition. We're seeing many local markets that are seriously affected by larger, more sophisticated operators. In addition, the prospect of new competition being built is coming back into the picture after a five-year hiatus.
Capitalization Rates/Ability to Finance
Capitalization (cap) rates are the shorthand way real estate professionals talk about values. In short, the lower the cap rates, the higher the real estate prices are in the current market. Todays cap rates are near the lowestthe highest pricesthat theyve been in the last 40 years! This change in cap rates is almost exclusively related to the unprecedented lower interest rates the market is experiencing.
One material difference in the market today is the low cap rates being paid are almost exclusively in major cities such as Chicago, Los Angeles, New York and San Francisco, whereas the rest of the country is seeing more historical norms. This is the new reality all potential sellers must understand. Properties in non-major markets will continue to see higher cap rates (lower values), as the market has consistently valued these properties at higher cap rates for the last few years. This is unlikely to change any time soon.
The low interest rates have also created tremendous opportunity for smaller investors because there are many compelling opportunities within smaller markets. With the cap rates 100 to 400 basis points higher in smaller markets, and with interest rates in the 4 percent to 6 percent range, it has created an arbitrage play within smaller markets worth considering.
Are You a Seller?
Determining if and when youre a real seller is the single most important step in the process of your investment. This is someone who has a defined reason to sell and is willing to price the sale at a level thats within the market of the property. Serious buyers want serious sellers, and when a buyer finds out a seller isnt realistic about selling because of price, timing or market conditions, serious buyers will seldom get interested again. The result is a non-serious seller offends his best prospectsand they will remember. Over pricing is not harmless.
Experience has shown that motivated sellers who are willing to accept a price thats reasonable in the marketplace will, in fact, see their property sell in a reasonable amount of time. This doesnt mean you have to accept a lowball offer, it simply means a deal is made so you get a fair value for your investment, and the buyer gets a fair value for the future potential of the property.
In summary, prices are strong and the uncertainties of the world never less settled, so if youre at or near one of those personal crossroads, its time to get serious about selling. These high prices will not last forever, maybe not even much longer. If youre thinking about selling in the near term, you should hurry while qualified buyers are scrambling to take advantage of the lowest interest rates in history.
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] .