When Selling Your Self-Storage Facility, Timing Is Critical to Maximize Investment Return

The majority of self-storage owners will one day be a seller. Thinking through matters such as financing, competition and personal goals will help them maximize their return on investment when that day finally arrives.

Real estate prices have been gradually increasing over the last several years, and self-storage has continued to be the shining star of “niche” real estate sectors. In these very optimistic times, many facility owners are giving some thought to selling their property rather than waiting out the market. Trying to squeeze out every last penny comes with the risk of going on the always bumpy ride of the next real estate cycle.

Typically, in a real estate transaction, one party’s gain is another’s loss. But today we're in a very unique situation, where buyers and sellers can both win. The current economic climate allows each party to achieve his goals without hurting the other's position.

There is a material difference between thinking about selling and becoming an actual seller. Eventually, almost all owners will become sellers. It’s a matter of when that concerns most of them. Thinking through the following factors will help you determine how close you are to becoming a real seller, which will help maximize your investment return. Now is a time to be smart, not emotional.

Financing

It's been well-documented that the current low interest rates have something to do with the pleasant situation most self-storage owners enjoy today. While this probably doesn't come as a surprise, the magnitude of the current finance market is worth more than a cursory nod. The low interest rates, along with some financial engineering (interest-only, high-leverage, Libor floater rates, etc.), have created a tremendous opportunity for investors to achieve very compelling cash-on-cash returns, all while paying very aggressive prices.

The availability and aggressive nature of the current financing market may have to do with the supply and demand for commercial real estate loans. According to Trepp LLC, a provider of information, analytics and technology to the global commercial real estate and finance markets, commercial mortgage-backed security (CMBS) debt due in 2014 is relativity low compared to 2015, 2016 and 2017.

CMBS Debt Due

2014

$66.9 billion

2015

$100.9 billion

2016

$109.4 billion

2017

$137.4 billion

Because of the relatively small amount of CMBS debt coming due over the last two years and this year, it has been challenging for financial institutions to grow their production. This has led many to make loans that are outside their traditional investment criteria; for example, they've made smaller loans or loans in secondary markets, and offered better terms to bowers to grow their production.

The growing supply of willing and able lenders and the shortage of qualified borrowers has swung the leverage to the borrowers for the time being, which has allowed sellers to reap the benefits of the qualified buyer’s ability to pay more due to better financing terms. However, it’s possible the pendulum could swing back to the financial intuitions in 2016 and 2017, as they will have many more opportunities to make loans.

Competition

Another factor facing sellers today is increased competition or potential future competition. We’re seeing many local markets being are seriously affected by larger, more sophisticated operators. In addition, the prospects of new competition being built is coming back into the picture after a five-year hiatus. New development is slow in coming; however, it never seems slow if one is built in your market!

A Real Seller

Determining if you’re a real seller is the single most important decision any self-storage owner can make. A real seller has a defined reason to sell and is willing to price the property at level within the market. Serious buyers want serious sellers. When a buyer finds out a seller isn’t realistic about selling due to price, timing or market conditions, he will seldom become interested again. The result is a non-serious seller offends his best prospects, and they will remember. Overpricing is not harmless!

Personal Issues

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 personal issues, not what brokers would consider market-driven factors. This tendency of owners to base their final decision on personal issues is entirely appropriate. However, with a bit of forward thinking about the market, small adjustments in the timing of a sale—one to three years—can have a very beneficial effect on an investment's internal rate of return. Just consider the value swings we’ve experienced over the last five years!

Any of the topics mentioned above may have a material impact on a buyer’s or seller’s investment outcome. It’s my unfortunate duty to report these unique market conditions will come to an end. I wish I could predict exactly when this will happen, but I can’t. It has been my experience that you can’t call the top of the market because by the time you make the call, the market has passed you by. If you’re at or near one of those “personal crossroads” or your gut tells you now’s the time to capitalize on the market conditions, it’s time to get serious about selling.

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.
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