By Ben Vestal

The self-storage real estate market is beginning to stabilize, and investors are once again seeking quality properties. To get answers to questions relevant to todays facility owners, buyers and sellers, I recently assembled a roundtable of real estate experts to discuss the state of self-storage in the southeast region. Ive asked them to comment on cap rates in their markets and share thoughts on how the industry will perform moving forward. Joining us in the discussion are:

As weve seen a dramatic swing in the volume of real estate transactions, from very few in 2009 to a more normal volume in 2010, what are the trends with cap rates and property values this year?

Allen Barnhill: Overall, well see cap rates hold steady. However, we have and will continue to see some separation or a gap in cap rates based on facility class, performance and location. In our major markets in Georgia, cap rates for class-A facilities have held up very well, and weve even seen a few cases where cap rates have moved a little lower than we expected. Theres a much wider cap-rate range for mature properties, all dependent on the local market conditions of demand, facility condition and performance. 

Shannon Barnhill Barnes: The trend in cap rates for 2011 will remain essentially in the same range as 2010. Cap rates could start trending upward if interest rates begin climbing. As the economy continues to improve and the chance of having a double-dip recession lessens, the Fed will likely begin to gradually raise interest rates. Theres a greater demand for class-A properties in major metropolitan areas, which is driven by cash buyers such as real estate investment trusts (REITs) that are not as dependent on financing. Class-B and -C properties in secondary markets are more dependent on capital availability and changing interest rates.

Godbold: With interest rates still at a low relative range, weve seen a decrease in cap rates for quality properties, particularly those suitable for institutional investors. Even so, for buyers and sellers to get together on a price, sellers must recognize the constraints of underwriting. Whether were working with an institutional cash buyer or a transaction that must be financed, deals are being underwritten on the basis of actual income over the past 12 or more months.

Weaver: Cap rates for stabilized properties in good locations are still in the 9 percent range, while 8.5 percent seems obtainable for excellent properties, and properties below the norm are at 10 percent or higher. Overall, occupancy rates have stabilized in most markets in north and central Florida. With stabilized cap rates and occupancies, values are no longer declining in most areas. However, increases in value will probably be slow based on slow increases in occupancy.

As the economy and real estate market start to recover, should owners consider selling or buying, or continue to operate their properties and see what happens?

Allen Barnhill: Based on my personal experience as a self-storage owner, the decision to sell, buy or hold really depends on the business and personal goals of the owner. For owners considering selling, some positives include cap rates holding in an attractive range for performing properties, and were seeing increased activity from buyers looking for self-storage facilities. The potential buyers include not only larger firms but also local and regional operators and investors. 

Godbold: As owners are considering the possibility of selling, there are two conflicting dynamics: attractive cap rates for sellers, and properties that have yet to rebound with regard to occupancy rates. When a seller decides to wait out the recovery cyclewhich, of course, is a viable optionhe must realize theres the risk of absorption back to the stabilized level he enjoyed two years ago and the risk that cap rates will increase, thus erasing some or all of the rebound in value. In North Carolina, were beginning to see a recovery in occupancy rates, but not back to where they were pre-recession.

LaGroue: Many factors are considered when buying, selling or holding a self-storage facility. If you own a facility and its a stabilized property with a proven track record for at least 12 months and is in a good location, now would certainly be a good time to consider selling. If a facility is in leaseup or doesnt have a proven track record, now may not be the most appropriate time to sell. There are definitely more potential buyers in the marketplace who are searching for acquisitions, but due to the financing and other aspects, it takes longer to get the deal done. These potential buyers range from the REITs to smaller operators who see the storage industry as a solid asset class even during these uncertain times.

On the flip side, nows also potentially a good time to buy if you can find the right property that suits your parameters. There appear to be more bank deals coming online that present not only a challenge but also offer a huge upside. For the owners who are still in rent-up, enjoy the self-storage industry or dont find themselves in a precarious economic situation, then its also a good time to hold onto their asset.

Weaver: Most owners we have communicated with are planning to hold, if they can. Theyre hoping to recapture some of the lost value theyve experienced in the past few years. Most buyers are looking for value-added opportunities. So, in most situations, theres still a gap between the seller and buyer. However, that gap appears to be closing.

What advice would you give storage owners looking to refinance? 

Allen Barnhill: First, the market for financing properties continues to gradually improve and thats vitally important to sellers, buyers and operators.  Second, its a good practice for owners to review their debt and financing on a regular basis and stay informed about the different financing options available. The goal is to ensure your financing is structured and aligned to facilitate meeting your business objectives.

Bill Barnhill: The financing market for self-storage has been improving steadily over recent months. I would advise storage owners to lock in a fixed-rate loan for at least five years, longer if possible, since most economists are predicting higher interest rates and inflation in the future. For stabilized properties valued at several million dollars or more, it would be advisable to obtain a conduit loan, since you can typically get a longer maturity and also avoid full recourse on the loan. Of course, you should plan on owning the property long term to avoid being penalized by paying a defeasance fee if it becomes necessary to pay off the loan prior to maturity. Using a reputable mortgage broker is often advisable when dealing with insurance companies and obtaining a conduit loan.

Godbold: You can expect to see attractive interest rates, but be aware the loan will be based on a trailing 12-month income and market-oriented expenses, including the potential property-tax increases, realistic salary expenses, and a provision for outside management.

Weaver: Interest rates are very favorable, but underwriting criteria is very strict. Many local banks have money to lend but are being selective and requiring larger cash equity, such as 30 percent to 40 percent.

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].