The threat of higher interest rates continues to lead many self-storage buyers and sellers to more closely examine their long-term goals. In this roundtable discussion, real estate experts in the northeast states offer advice to facility owners who are considering the sale or refinance of their storage assets. They also discuss buyer underwriting and the impact of new development in their markets. Participants include:
- Guy Blake, Pyramid Brokerage Co., Newburgh, N.Y.
- Linda Cinelli, LC Realty, North Branch, N.J.
- Chuck Shields, Beacon Commercial Real Estate, Radnor, Pa.
With the nation’s unemployment at 7 percent and the Federal Reserve’s bond-buying program beginning to taper, we’re most likely going to see higher interest rates. What should self-storage owners be doing to make sure they’re well-positioned to succeed in the coming months?
Blake: If you’re a seller, you should sell. If you’re not, refinance to a fixed-rate mortgage. Other than that, do everything you can to increase your occupancy and raise your rental rates when you can.
Cinelli: Owners need to bring their economic occupancies up. When reviewing a facility for purchase, this is where the buyers and lenders will evaluate whether the facility is performing efficiently. In the New York and New Jersey markets, buyers will look at the expense ratio of the property and compare it to the average for our area, which is between 40 percent and 45 percent. Real estate taxes are also a big factor in the northeast tri-state area.
Shields: Since interest rates are most likely to increase at some point in the future (who knows when), owners should review their current financing and determine what their options are for refinancing. Taking advantage of the low cost of debt and aggressive lenders will position owners to maximize their cash flow. Also, if owners are experiencing high occupancy, they should review the possibility of a rate increase.
With prices now 2 percent to 4 percent higher than the last real estate boom (2007), how have buyers adjusted their underwriting?
Blake: The big difference between 2007 and today is buyers and lenders are not putting nearly as much faith in pro forma numbers. Capitalization (cap) rates and internal rate of returns are being calculated using trailing 12-month income and expenses, period. Buyers are attributing very little value to vacant units and potential. There has probably never been a better time to sell. Record-high prices and record-low interest rates create the best value for sellers. Refinancing is also a good idea, as interest rates will not get any lower.
Cinelli: We’re seeing some buyers start to look toward the future income of the facilities and placing potential opportunity in the cash flow. Owners who are thinking of an exit strategy within the next five years should take the money and run! With low availability of self-storage facilities for sale, especially in the tri-state area, there’s a strong demand, and cap rates have come down significantly.
Shields: Like lenders, buyers are imposing more rigorous underwriting standards on the facilities they acquire. They’re looking more at historical performance vs. future or pro forma income, and there’s more focus on the actual net income. Outside influences such as the marketplace, competition and barriers to entry are also given more consideration to value. Owners should consider selling since values are high; but if they’re keeping their facility, refinancing should be considered since interest rates are so low. Additionally, it’s a great time to expand their portfolio since the cost of money is so cheap. So owners can’t go wrong whatever they decide to do.
Do you believe development will have a major impact on your local self-storage market?
Blake: The Northeast is a mature market, so I don’t expect a lot of new facilities to be built this year. I’m seeing a number of facilities expanding, however, which indicates an uptick in demand over all.
Cinelli: We’ve found over the last several years there was no demand for ground-up deals. With little inventory, the development will start popping up. This industry has strong demand for growth, and if the large operators can’t buy, they’ll build. We see developments coming up where the approvals were in place and they basically were ready to go. Some sites were sold as part of packages that were sold through foreclosed properties or where loans were taking from the backs.
Shields: I don’t see much indication for development of new facilities in Pennsylvania in 2014. Optimism in the economy is relatively recent, and the investment of time and money to new development in 2014 would have required a commitment in 2013. In most instances, the approval process and the barriers to entry are very challenging for development. I suspect we’ll see development going forward, but not much this year.
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]; visit www.argus-selfstorage.com.