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Buying Self Storage Properties in 2009

The self storage industry like other commercial real estate markets’ is experiencing the beginning of a downward cycle in value and occupancy.

Author: Jeff Cain

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The runaway ever decreasing capitalization rates of a few years ago has ground completely to a halt. These ridiculous values and low returns were fueled by cheap and easy credit, which is certainly gone. We are now back to the days where lenders actually want a property to be stabilized, before lending on the property. So CAP (capitalization rate – NOI/Price) rates have escalated dramatically in the last year and will continue to escalate. Today’s CAP rates are with some of the lowest interest rates ever seen. What happens as interest rates go up, CAP rates will undoubtedly also rise. I know very few people who think interest rates will not be going up relatively soon.

Foreclosures: I have no idea exactly how many self storage properties will be foreclosed on and sold by the banks, but it will be big number. They are already starting to appear on the market although not as quickly as I would have thought. But, if you think about it like this: If an owner paid 3.0 million for a self storage property on a 7 capitalization rate, the owner would have to raise the NOI by 28.6% just to break even. This extremely large increase would need to occur during a period of increasing vacancy rates and decreasing rental revenues. If they financed any significant portion chances are they can’t sell it for what they owe and a bank won’t finance it without having to put more cash in the deal because it won’t appraise for what is owed because of the increase in CAP rates.

Prices: My opinion on prices is that we are only at the beginning of a downward trend in prices. The large number of foreclosures coming and the more stringent credit markets will drive prices downward. Although, generally considered some what recession proof the self storage industry is not likely to see the “good ole days” of high occupancy rates and increasing rental rates we saw a few years ago. I believe if purchasing a self storage property in the next year or so an investor needs to be thinking in terms of prices being lower and CAP rates higher in the next few years. As I illustrated above, market CAP rates increases can be difficult to overcome when investing in income properties.

Demand: This factor can be both regional and local in nature, but for this discussion we will talk about the overall demand of self storage. Demand would appear to be hanging in there during this recession. Significant discounting is generally required and occupancy rates are down but not as much as other commercial real estate markets. My concern with regards to demand is to some of the high end self storage units and the glut of these on the market. We, as an industry encountered a huge proliferation of expensive climate controlled and non climate controlled facilities. I question the real market long term for these units which require huge rental rates to make economic sense to build and operate. In some high income areas, these facilities will probably do OK going forward. But I see a real reluctance on the part of the self storage consumer to pay these “boutique prices” for a self storage unit, no matter how nice the facility appears on the outside. If you are buying a facility with high rental rates be conservative when projecting future rental rates.

As a general rule I would recommend being patient and conservative when looking for a self storage investment in 2009. Deals can be made now, an investor just needs to think about 3 years from now not 3 years ago and if you are looking to sell I would tell you to be realistic and get what you can now because the longer you wait chances are the less you will get.

About Author

Jeff Cain has owned and operated self storage facilities in the Southwest since 1991. He also is a real estate broker specializing in the sale of self storage investments.
http://www.SW-SSA.com, www.NorthPhoenixStorage.com

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Buying Self Storage Properties in 2009