Whether you are a buyer or a seller of self storage properties, paying attention to the overall self storage market and valuations can make hundreds of thousands of dollars’ worth of difference to your bottom line. Real estate market cycles are broken down into four categories: recession, recovery, expansion and oversupply. We believe that the market is currently at the end of the expansion stage and is about to enter into oversupply, but it is helpful to look into the past to see some of the lessons of the market, especially when you are preparing to sell your self storage asset.
From 2008 to 2012, the market was in a recession. The main characteristics of this time period were rising cap rates, lenders unwilling to fund loans, reduced property valuations and values lower than existing debt on properties. Due to these recessionary characteristics, very few property owners were able to sell, and the properties that were sold during this time period were sold under financial duress. Buyers who were able to find deals often ran into road blocks when it came to lending.
The recovery phase of the self storage market occurred approximately between 2013 to 2016 as the Federal Reserve reduced interest rates to all-time lows. As a result of dropping interest rates, property valuations began to increase, capitalization rates hit all time highs (4% to 7% in recovery from 8% to 12% in recessionary period), buyers had lenders competing for their business and buyers began to flood the market seeking self storage assets.
The market has been in the expansion phase since about 2016. This has been characterized by low but increasing interest rates, which we feel will soon tip the market into the oversupply phase. The past few years have been great for sellers, as more and more buyers entered the self storage market and lenders were more than willing to underwrite deals. According to the Self Storage Association (SSA), the valuations were at their peak somewhere between Q3 2016 and Q3 2017. An additional tailwind to the industry was provided by private equity firms which had appeared to fall in love with the type of returns that self storage properties could bring.
As more and more self storage properties pop up all over the country and current facilities expand their capacity, the market is trending into the oversupply category which we feel will fall some time from 2019 to 2022. The more the markets become fully saturated by underutilized square footage of space, the less new construction makes sense and it will eventually grind to a halt. Certain markets are already showing rising cap rates and are seeing occupancy levels decline as well. The more competition that is created, the harder it will become to increase NOI and facilities will struggle to maintain the valuations seen from 2015 – 2017. In addition to this natural market development, the Federal Reserve is also increasing their funds rate with three hikes expected in 2018 and four in 2019. Higher interest rates will push certain properties away from being attractive to a buyer, and the market of buyers will shrink along with the number of lenders willing to underwrite deals.
To put this into perspective, we took a look at several actual valuations done for clients over the past few years and the lesson has been relatively consistent with what we expected. Below is one example of how the same facility with the same NOI is valued differently based on the market over time.
Cap Rate Summary:
- July 2018
- 75% Cap Rate
- Interest Rate 3.75%
- Valuation – $6,925,000
- March 2018
- 6% Cap Rate
- Interest Rate 5.5%
- Valuation – $6,150,000
- Loss of $775,000 from peak of market
- December 2019
- 0% Cap Rate
- Interest Rate 6.25%
- Valuation – $5,850,000
- Loss of $1,075,000 from peak of market
The same exact property was worth nearly $800,000 more at the peak of the market in 2016 than the latest valuation in 2018. The property will lose another ~$300,000 worth of value through 2019 if the market keeps moving in the direction it is currently.
Savvy sellers who are paying attention to the market realize that there is a short window of time left to get the maximum value for their single property or multi-property portfolios, and they are listing their facilities for sale now. Savvy buyers are likely waiting for those who overpaid for properties between 2014 and 2017 and couldn’t improve the NOI enough to be profitable when the interest rates are high. Bank foreclosures are possible and the distressed properties will affect the overall market valuations.
To maximize your value in the next 18 to 24 months, it is imperative to review tenant rates and implement rate increases periodically. Another important factor is to maximize tenant insurance penetration to at least 70%. Find some untapped revenue by implementing late fees and administrative fees if you haven’t done so already. Additionally, as the population becomes more reliant on the internet, adding online rental programs and implementing SEO strategies to get to the first search page on sites like Google will increase your occupancy rates by allowing you to capture additional tenants who may be currently unaware of your existence. In some cases, it is beneficial to re-evaluate your expenses to see where it can be lowered through automation of certain processes or simply negotiating with several vendors to bring down the costs of insurance, maintenance, etc.
If you are thinking that you need to look at a property valuation and the possibility of selling your self storage assets, contact us today. We offer a free and confidential valuation of your self storage property and our team of brokers can help you determine if now is the time to sell for you!