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November 1, 1999

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Self-Storage and Brokers and Sales--Oh My!Is now the time to sell? If so, do you need a broker?

Self-Storage and Brokers and Sales--Oh My!

Is now the time to sell? If so, do you need a broker?

By Maurice Pogoda

It's no secretthat we are experiencing a self-storage boom. Occupancies are high, rents continue toincrease, and most owners have cash flows they never dreamed possible. With business sogood, why would anyone consider selling? And, if they did decide to sell, why bother witha broker? As usual, the answer comes down to time and money.

A Growth Industry for the New Millennium?

What a difference a few years can make: Just seven or eight years ago many owners wereworried about holding onto their properties in the face of the Savings-and-Loan crisis. Incontrast, the late 1990s have been characterized as a period when self-storage appears tohave come into its own. Wall Street, institutional investors and a multitude of individualinvestors have all discovered the viability of self-storage as a real-estate form that canachieve exceptional returns.

The late 1990s have been a seller's market. While hordes of first-time self-storagebuyers search for the right property, real estate investment trusts (REITS) became thebuyers of choice for any well-located property greater than 40,000 square feet. REITS wereso aggressive in their desire to secure market share that prices rose to unheard of--andwhat many considered to be unsustainable--levels. The fall 1998 crash of the securitizedloan market hurt the REITS' ability to raise capital, effectively taking them out of themarket for about six months. Starting in the spring of 1999, the REITS slowly began tosearch for new properties, but were not paying the same prices as before.

As sale prices increased above replacement cost, investors and developers, many with noself-storage experience, began searching for land to build new properties. In themid-'90s, after years with little or no construction, new facilities began to mushroom.High consumer demand and cheap money fueled the greatest self-storage building boom sincethe late 1980s.

For those of us who lived through the real-estate depression of the early '90s, itseems like "deja vu all over again." Some areas have already become saturated,with occupancies starting to dip. Occupancies in the 80 percent to 90 percent range haveonce again become commonplace. Rental rate increases, while commonly 5 percent to 8percent every year in the mid-'90s, have slowed down considerably in all except selectlocations or on specific sizes that tend to vary by area.

Have You Missed the Boat?

If you have not sold your facility, but are considering selling, your local marketconditions will determine if you can achieve a high sale price or not. The industrypsychology stills favors the seller. We are not yet in the downward phase of thereal-estate cycle as is evidenced by relatively low interest rates and the strong nationaleconomy. Buyers still consider self-storage to be a "hot" property type.

The greatest concern to a potential seller is overbuilding. It is a concern not justfor the new self-storage developer, but to existing stores as well. While it is likelythat a new developer has the most to lose (higher land costs, higher construction costsand no occupancy), the owner who would like to sell his store will not get the highestprice if he is in a market with falling occupancies. The owner with an older property canprobably weather lower occupancy because of his lower initial costs and a base of existingtenants.

An area with falling occupancies will also have decreasing rental rates as competitorsresort to discounting prices to attract tenants. This vicious cycle is nothing but troublefor the owner who wants to sell. Most buyers look at current and future income. If youroccupancy and income are going down, you will not receive the same price that you mighthave before new competitors spoiled the fun.

If you are blessed by being in a market with little or no new competition, there isprobably no better time to sell than now for the reasons mentioned above (low interestrates, strong economy, etc.). If you are aware of new competitors considering entry orabout to start construction, it may not be too late to still achieve that dream price.

How Can a Broker Help?

A good broker can help you realize a sale price considerably higher than you mightreceive on your own, even net of commission. A self-storage specialist will know howself-storage properties are sold (e.g., capitalization rates), who the buyers are--bothlocally and nationally and--in general, will understand the nuances of the industry.

A knowledgeable self-storage broker will guide you and the buyer through what is oftena very complicated process. He will be comfortable dealing with attorneys, bankers,inspectors, the title company, environmental company and surveyor.

The first place to start in finding a good broker is to ask some questions: Are they properly licensed? Are they specialists in self-storage brokerage? Will they supply you with references? How many facilities have they sold? How will they market your property? What are their fees and what do they include?Finding a broker who specializes in self-storage is of paramount importance. Givingyour friend at the local Century 21 office your listing will cost you time and money. The Sale ProcessOnce you have hired your self-storage sales specialist, he should help you set arealistic sale price, allowing some room for negotiation, and put together a marketingprogram that combines advertising, direct mail, personal contacts and property showings.This is a targeted program focused on the most likely prospects for your property. The first step in this program is a detailed brochure for potential buyers. Thispackage should contain all the necessary information that a buyer will need to make aneducated offer on your property. It should include: property address, directions, lotsize, information about the area, zoning, a unit mix with rental rates and occupancy bysize, current income and expense information for the past 12 months and prior year, anas-built survey of the property, location maps and pictures of the property.Once you have approved the marketing brochure's contents, your agent should search hisdatabase of self-storage buyers, contact other self-storage brokers, advertise inappropriate mediums and arrange showings of the property with the most qualifiedcandidates that will consider buying your property. If the above process is followed by aqualified self-storage sales specialist, you will most likely have numerous offers toconsider. Now the fun begins. Negotiating the SaleNegotiating the sale can be the most challenging part of selling. The sales agent canbe most useful in guiding both parties through what can often be a very tense situation.The agent's value becomes apparent by the skill they show in helping the seller and buyerachieve mutually agreeable price and terms without rancor. The agent is the"buffer" between buyer and seller.The period between the signed purchase agreement and the closing is usually severalmonths. During this time, known as the "due-diligence" period, the buyer willexamine your physical property and financial records and obtain financing. A good agentwill be instrumental in helping make this as smooth a process as possible. Coordinatingthe closing with the attorneys, title company, mortgage company, buyer and seller is thefinal task performed by your self-storage sales specialist.So, Do You Really Need a Broker?It depends. Theoretically, a broker that specializes in self-storage sales will exposeyour property to qualified buyers, which will result in more offers and a higher price. Hewill also save you much time and effort by coordinating the myriad of nitty-gritty detailsinherent in any transaction. If you value your time more than the cost of the commission,it is well worth it to hire a qualified broker. If you consider yourself to be an"insider" who is well-versed in real-estate transactions, knows the"players" in the industry, understands sales trends, is a good negotiator, andis willing to do a tremendous amount of legwork that will consume an inordinate amount ofyour time, selling your property yourself may be the right way to go. If not, leave it tothe professionals.Maurice Pogoda is president of the Pogoda Companies based in Farmington Hills,Mich. Pogoda specializes in the brokerage and management of self-storage facilities in theMidwest. The company has brokered more than 50 self-storage sales and currently manages orowns 22 self-storage facilities, with two more under construction. For more information,call (800) 326-3199.

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