Western United States

Self-Storage Real Estate in the Western States: Experts Discuss Interest Rates, New Development

Real estate experts in the western United States discuss new construction in their markets and offer advice to owners who are thinking about selling their facilities or refinancing existing loans.

With lending back online, many are predicting an increase to the current low interest rates, which could have a significant impact on self-storage buyers and sellers. In this roundtable, real estate experts in the western states discuss new construction in their markets and offer advice to owners who are thinking about selling their facilities or refinancing existing loans. Participants include:

  • Steve Boldish, Oregon Self Storage Brokers, Medford, Ore.
  • Tom de Jong, Colliers International, San Jose, Calif.
  • Jeff Gorden, Eagle Commercial Realty Services, Phoenix
  • Joan Lucas, Joan Lucas Real Estate Services, Denver
  • Jason Wilcox, Raven Commercial Real Estate, Kent, Wash.

Unemployment is now at 7 percent and the Federal Reserve’s bond-buying program is in position to start tapering, which will most likely lead to higher interest rates. What should savvy self-storage owners be doing to ensure they’re well-positioned to succeed?

Boldish: Owners giving thought to selling in the near future, particularly those in second- and third-tier markets, should consider putting their property on the market in 2014. Rising interest rates and tighter federal lending guidelines will drain the buyer pool and lead to lower sales prices. First-tier markets remain strong, especially for larger facilities.

Gorden: Savvy property owners would do well to take stock of their plans for the entirety of the next real estate cycle. Long-term holders who use debt should secure it now for the long term while it is relatively low-cost. Development-minded investors would benefit by having their house in order and projects in the pipeline. Historically, as interest rates rise and lending becomes more profitable, there's more debt financing available, albeit at higher cost.

Wilcox: The most important thing is for investors to understand their leverage. With expected higher interest rates, owners and investors should look to hedge their interest-rate risk and rate lock.

With real estate prices now 2 percent to 4 percent higher than the last real estate boom (2007), how have buyers adjusted their underwriting? Should owners consider selling, refinancing or expanding their portfolio?

Boldish: Buyers are asking for past three year’s income and expense in addition to trailing 12 months. The days of selling on pro forma income are gone. Buyers are also seeking upside potential by scrutinizing a facility’s market rates and occupancy vs. their competition. When deciding to sell, refinance or expand, each owner needs to thoroughly examine his particular market.

de Jong: The dynamics are different in each market. The top markets in California have benefited from a huge imbalance of buyers to sellers driving pricing up to historical levels. The additional media coverage on the real estate investment trusts and the self-storage market in general have certainly helped contribute to the aggressive pricing we’ve seen.

In smaller, more rural markets, however, the dynamic is different, with prices and capitalization rates lagging well behind the larger markets. Depending on the owner's individual circumstances, he could be encouraged to sell now given the high prices, refinance given the low interest-rate environment, or expand now that banks are lending again (albeit more cautiously) on development projects.

Gorden: Buyers today are underwriting to actual performance with a confident expectation of reasonable revenue growth. It's reported that household wealth has recovered from the recession, largely due to a run up in the stock market, and the housing market and household formation is on the upswing in most markets. Rent growth has been strong in the multi-family arena, and one would expect some translation to self-storage. To sell, refinance or expend the portfolio is a personal decision for each investor, but the opportunities for each are great, if only for the near term.

Do you believe development will have a major impact on your local market in 2014? If so, how may self-storage projects and square footage are currently in the planning stages?

Boldish: At this time, I don't have definitive numbers on new construction starts in Oregon, but in the past six months, I’ve been contacted by several investors seeking land in tier-one markets to build new facilities. They're also seeking existing properties that lend themselves to expansion or conversion. This is a definite change from the previous three years.

de Jong: Development is making a major comeback, which started earlier in 2013. Although there's heavy demand to develop, the San Francisco and Silicon Valley markets are seeing outrageous valuations on land prices and huge barriers placed by local planning departments. Self-storage is not the first choice local agencies typically would have for a site, so caveat emptor (let the buyer beware!) that if zoning doesn’t allow for self-storage as a use, you may be facing an uphill battle!

Site selection is going to be the biggest constraint to local development, with conversions likely gaining in popularity. As this time, I’m aware of four new self-storage developments in the Bay Area, with at least several more likely to pop up throughout the year.

Lucas: There are very few places left in the Denver market that really could use another self-storage facility. However, we recently completed a study to take a look at what is currently on the drawing boards and were amazed to learn there are 13 facilities totaling well over 1 million square feet in the development pipeline across the Front Range. This is not good news and shows we may be heading into another cycle of overbuilding in the near future.

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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