The Changing Character of Self Storage

Posted by Poppy Behrens on Oct 18, 2010 12:00:00 AM

 

By Steve Burpee

SSBA Listings The real self-storage property of yesterday that we all grew to know and love is passing away, and, while it should come back stronger than ever, it will take a few years. Gone are the selling characteristics of self-storage from the mid-90s to 2008 such as financing with 10 percent down, sales based on “pro forma” and cap rates in the low sixes and in some cases the high fives.

While we wait for the self-storage market to stabilize, owners must refresh their image and increase the value of their investment. Take a good look at your facility. Do your doors need to be replaced, painted or have new hardware added? Could the aesthetics of your facility benefit from re-paving or sealing? Or perhaps adding some graphics on the buildings, or an electronic sign or just some plantings of flowers or bushes to enhance curb appeal? We have found that security and convenience of use remain the primary factors for tenants choosing their facilities. Is there anything that you can do that will enhance you storage facility?

As for increasing the value based on a higher net cash flow, have you looked at making insurance mandatory? There is a reason why the REITS are doing this. Obviously it does reduce your liability and may increase your cash flow. Are your billing procedures and software outdated? Should you give discount bonuses to tenants renting more than one unit? Are you losing potential customers who drive by and see the office closed or call in to inquire about availability and get a recording? Do they then drive to or call the next-closest facility? If so, have you thought about installing a point-of-purchase kiosk to get the drive-bys or a call center so the phone is answered on every call? A review of your management system by experienced self-storage brokers or consultants could provide you with many ideas on how to be more efficient and effective.

The most important thing an owner who wants to sell his facility can do is to prepare the data that all buyers need to make a buying decision. Locate an experienced broker who can provide you with a due diligence list that almost all buyers use and gather the information so it is ready when a potential buyer comes knocking. Have a title company get you a preliminary title so you can review it to see if there are any items that need to be cleaned up. Make sure you have a copy of a survey for your property. A list of all the utility providers will be helpful as well as the local government agency contact information. And make sure you can provide at least three years of historical financial information. Even if your occupancy is down, it can be helpful in showing recent upward trends, indicating better times ahead. Buyers who are serious about making a purchase need a lot of information to make a decision, and, if you do not have what they need, they will move on to the next property where the information is available

It is predicted by many economists and other experts that the economic recovery will be slow and drawn out. This will have a direct impact on the self-storage industry. Vacancy levels that decreased by 10 to 15 percent will continue to haunt those owners who are not proactive in managing their facilities. Make sure you understand and can manage your new stabilized occupancy level.

After recently representing the buyer on the purchase of a $40 million self-storage portfolio for a client, several things became very clear. Cap rates vary from region to region and within each market area. Buyers are looking for specific capitalization rates based on actual 12-month trailing numbers. We tried to locate properties first in the Northwest, then expanded the search to the West Coast and ended up on a nationwide search in order to locate our client’s cash-on-cash return goals. The East Coast ended up providing the most properties fitting our criteria.

We found many properties for sale with varying levels of occupancy, but most owners were unrealistic about the price they were willing to accept. For the most part, it may have been attributed to what they owed and “had to have.” Many hung on to the notion that the prices of two years ago will return. I am not sure that will be the case. Owners will have to sell based on the current market factors, or, if the owner is “upside down,” the property could end up foreclosed and back with the banks.

We are seeing more self-storage foreclosures today then ever. If the banks get the property back and they don’t move it quickly, they might even discount the mortgage note. They don’t want to run a self-storage business. The banks just want the mortgage loan off their books especially with the feds watching them closer then ever.

As loans become due and owners try to refinance their property, they discover that they may have to come up with a fairly large “down payment.” The equity position of 30 to 40 percent required by the lenders is gone due to the rising cap rates and decreasing occupancy levels. Many do not have the additional capital, so what should they do? Selling at a reasonable price based on market conditions may be the only answer other than giving it back to the lender. Also there are other options that could be explored that are too detailed to go into in this short article. It might be prudent to seek out a knowledgeable self-storage broker or some financial consultants for some specific answers to these problems.

Steve Burpee is Managing Broker for The Pegasus Group of Prudential, an affiliate for the Self Storage Brokers of America, Inc.