The long-term outlook for the nation’s self-storage market remains positive, despite the current global current economic crisis. Overall, the commercial real estate sector faces many challenges as cap rates rise, the market for fully occupied properties shrinks and acquiring financing becomes more difficult. Investor confidence in commercial real estate continues to wane as the economy moves further toward a recession.
During this time of uncertainty, sellers and investors require more information on the state of the self-storage investment market and more personalized client service. Today’s biggest challenges for self-storage investment specialists are acquiring financing for transactions and moderating sellers’ expectations based on actual demand.
In this tumultuous market, utilizing the services of an experienced, third-party intermediary is more vital than ever. Acquiring qualified buyers for self-storage properties has become more difficult as buyers have become much more selective. Buyers are scrutinizing every deal; the slightest mistake in underwriting will lead to deals collapsing. The fact is its more challenging to get deals to the closing table, increasing the value of self-storage specialists.
There are several key components to closing a self-storage transaction in today’s economic environment. The underwriting must be based on actual net operation income (NOI), with absolute transparency in the deal. Also, the self-storage property must be priced and positioned properly in its submarket. The buyer should be selected not only because he makes the highest offer on the property, but also because he has the ability to close. The buyer should possess equity, a banking relationship and experience to operate self-storage facilities.
Some self-storage sellers may want to sell their properties themselves to save on broker fees; however, what those sellers save in broker fees they will most likely lose at the bargaining table. A qualified broker offers a client local market expertise with a national marketing platform and perspective, matching every property with the right investor.
Brokers should be excellent marketers since marketing plays a larger role in this current real estate climate. A broker has to demonstrate why a potential investor should acquire the property by revealing the property’s upside. When looking out for their clients’ best interest, brokers must also be excellent negotiators, possessing the ability to cut through the red tape to get both the seller and the buyer to agree to work toward closing.
To manage the expectation gap between buyers and sellers, brokers must document every sale in their local market and track every listing to demonstrate which properties are receiving offers. By tracking all comparable assets in their respective market, brokers can show sellers the true value of their property. A seller may have been offered a certain dollar amount in the past, but in today’s market, the price at which deals are being trading has likely dropped between 30 to 60 percent.
- When hiring a professional, experienced broker, you can expect:
- Expert market knowledge
- Extensive access to private and institutional equity
- Custom-tailored marketing
- Strong banking relationships
- Ability to negotiate on the client’s behalf
- Appropriate underwriting to match current market conditions
Commercial property sales were abnormally high in ’06 and ’07 because of the frenzy in the market. Since then, the capital markets crisis has caused the shift to the other extreme, which has pushed property sales to abnormally low levels. In 2008, sales volume dropped approximately 70 percent over last year’s pace. In the next several months, investment sales are likely to remain hampered due to the ongoing credit crisis and a major price expectations gap between buyers and sellers.
By mid-2009, many brokers expect financing to become at least moderately more available as banks begin to lend again, albeit with tight standards. Also expect to see the pricing gap to begin to narrow in the next two to three quarters. For lower quality assets in secondary and tertiary markets and/or distressed properties, sellers will have to become realistic about pricing in order to clear the market.
On the other hand, there are no indications of wholesale discounting of quality real estate in strong markets so buyers will have to recognize that value. Most activity will continue to be driven by private capital in the first phase of the recovery.
The market is evolving to keep up with the changing economy, shifting demographics, land-use issues and consumer tastes. One thing that does not change for investors, however, is the importance of proper due diligence and the value of a qualified broker. Investments in self-storage can be very profitable, but it pays to make the right decisions up front.
Michael Mele is vice president investments and senior director of Marcus & Millichap’s National Self-Storage Group in Tampa, Fla. He can be reached at 813.387.4700; e-mail [email protected].