There are many reasons why some self-storage owners are in no rush to sell their facilities. Some want to keep the cash flow, while others don’t know what they’d do with the money from a sale. Some believe they’d be bored without the business to manage or just aren’t sure now is the right time to exit. Each of these reasons has merit, but it’s also important to understand present market conditions and how they’ll affect you in the future.
Before deciding to sell or hold on to your storage asset, you must first weigh all the facts. Here are four common scenarios that keep owners from selling and how these situations fit in the current market.
1. You want to keep the cash flow. Many self-storage facilities are currently generating significant returns. Cash flow is consistently increasing due to rent increases and high occupancy. So why would you cash out?
As market cycles shift and operating fundamentals change, the amount of cash flow available through a property will most likely change as well. You should discuss with a reputable financial adviser what your plan is for the future and what alternative investment vehicles are available to you. There might be an easier way to garner similar cash flow with fewer headaches.
2. You aren’t sure what to do with the money from the sale. Right now your money and wealth is tied into the facility, which is generating a certain return on investment. Depending on your financial situation, there are benefits to making your investments more liquid to allow more flexibility and future opportunities. The self-storage market has never been hotter, which means values are at record highs. But this won’t last forever. As the market shifts, it’ll be harder to monetize your assets, and doing so will be for a significantly lower value than what you could get for the property now.
A good financial adviser will be able to work with your specific situation to decrease your tax implications and ensure you continue to receive a similar return. While rents are forecast in the near term to continue to rise in most markets, the increase in revenue is generally not enough to cover even a quarter of a percent rise in cap rates. For an example using the following graph, if the capitalization (cap) rate for a property increased from 6 percent to 6.5 percent, the net operating income (NOI) would have to rise by more than 8 percent to maintain the property’s value. A 1 percent increase to 7 percent would require NOI growth of almost 17 percent.
3. You think you’ll be bored without the business to manage. The only question to ask yourself is if you see yourself owning your property for another 10 to 15 years. If you’re going to continue to work your facility for that duration, the market cycle may very well return to where we are now, and you should be able to get a similar value for your facility.
If you don’t plan to hold on to your assets for another 10 to 15 years, I recommend cashing out now. There are always other ways to stay busy, including a different type of career, investing in other businesses, pursuing your hobbies, or spending more time traveling with your family. By cashing out now, you’ll also ensure you have plenty of cash available to capitalize on buying opportunities when the market corrects.
4. You just aren’t sure now is the right time to sell. If you are even thinking about whether to sell now or anytime in the next several years, now is the right time. The market will eventually shift, and then your property will be worth less. Cap rates are at historic lows due to the low interest rates, large amounts of available capital, limited new supply, strong operating fundamentals and industry consolidation. The convergence of these factors has driven up values to record highs, particularly in high-growth locations.
Due to this perfect storm of conditions, many buyers are trying to get a better deal on properties by circumventing competitive market forces and sending direct offers to owners. To make sure you’re getting the most value out of your assets, hire at least one or two professional market valuations on your property. These should be done by reputable brokers who are active in your market. They know current market values better than anyone, and this will ensure you don’t leave any money on the table.
To be clear, if your goal is to receive the highest value for your facility, then you should either sell now or plan to hold it for at least 10 years. If you wait to sell sometime in the next decade, there’s a strong probability you’ll have to settle for a lower value than if you were to sell now. However, if you have a long horizon and are willing to hold on until the next market cycle, or if your goal is something other than the highest price, there is no reason to sell now.
Jay J. Crotty is a managing partner with SkyView Advisors (formerly BayView Advisors), a national investment sales and advisory firm focused exclusively on the self-storage market. Jay provides a range of advisory services including acquisition, disposition and recapitalization strategies, asset valuation, joint-venture structures, and debt and equity finance strategies. The SkyView team has completed more than $1 billion in transactions throughout their careers. For more information, call 813.579.6363; visit www.skyviewadvisors.com.