Article by Ben Vestal
Argus Self Storage Sales Network
As investors are enjoying the fluid nature of today’s transaction market, it has become evident that buyers and sellers may need to focus on more than just purchase price. We are in an incredible period for the self-storage industry where the unconventional and unexpected have become a part of everyday business. The influx and sheer amount of buyers/equity in the self-storage space over the last few years has led to higher transaction velocity, higher values and has, much to my surprise, extended the self-storage investment cycle with very little signs of slowing down.
As real estate investment brokers, we sometimes forget that our world of day-to-day real estate transactions is quite unfamiliar to our clients when they decide to buy or sell a self-storage property. With this in mind, I thought I would take you through some of the less obvious parts of today’s self-storage transactions and explain not only the activity but also the associated strategy.
Deal Structure: If you are in the market as a buyer or seller of a self-storage property, it is important to understand that the structure of the deal can be as important as the purchase price. With very sophisticated capital continuing to enter the market and values continuing to remain high, alternative structures are becoming more and more common. Too often the buyer and seller only focus on the purchase price and glaze over the structure without considering the financial implication of the structure. We have advised our clients on many deal structures that include UpReits (OP Units), preferred equity structures, and price allocations, just to name a few. These all allow a buyer or seller to achieve different goals and it can be very beneficial financially if you understand the structure. But, as always, the devil is in the details. It is important to remember that each buyer and seller’s situation is unique, so please seek tax and legal advice from an experienced deal lawyer and accountant.
Deal Pricing: Today’s very fluid market has made it difficult for even the most sophisticated investment broker, and nearly impossible for a local investor, to pinpoint the exact value of a self-storage investment. Oftentimes our clients are thinking about a price that would make them ecstatically “happy” and not the price at which someone would actually buy the property. In the world of real estate transactions, the market usually has a relatively narrow band of market value. However, today’s unique self-storage investment market has led us to a much wider band of market values.
It is not uncommon in today’s investment market for offers on a $10,000,000 self-storage listing to be several million dollars apart (10%-25%). It is important to remember that overpricing is NOT harmless! You must diligently and carefully analyze the value of a self-storage project. You should consider the traditional valuation techniques such as market sales comps, price per square foot, impact of new development, embedded value and the income approach. In addition, you must also have a good feel for the national self-storage investment sentiment and trends. We are seeing more and more national and regional buyers expanding to secondary and tertiary markets, where there has been far less new development. This has driven prices up in smaller markets while the valuations in major markets are flat or softening. Keep in mind that you should not be misled to believe your secondary market property is a 5% cap deal. We are seeing secondary market deals in the 6%-8% cap rate range and major markets in the 5.5%-7.5% cap rate range. These cap rates assume market rate operating expenses for underwriting; i.e. payroll, offsite management fee, adverting, R&M, etc. Secondary markets may not get the same respect as major markets, but it is clear that in this cycle that is
where the smart money is going.
Marketing: When taking a property to market, it is important to note that the difference in quality and risk are often very subjective. For example, a relatively low occupancy might indicate a poor performing property, or alternatively, a great opportunity to increase occupancy and revenues. For this reason, it is extremely important to broadly market properties to find the buyer who has the most optimistic view of not only your property but of the investment market today. Always beware of the broker or colleague that says “I have the right buyer for you. We don’t need to market the property.” In order to maximize your value, you are looking for the buyer who is qualified and sees the opportunity to improve your property. The more qualified prospects who are exposed to your property the better chance you have of maximizing your sales price.
In order to maximize your value when selling your property today, you must hire an investment sales broker who has experience and national reach! When considering a sale, you would be well-served to focus on how your broker will structure the deal and market the property and focus less on the price. MM-IV
Ben Vestal is the President of the Argus Self Storage Sales Network, Inc., the nation’s premier brokerage network for self-storage facilities, and has been actively involved with the management and growth of the company. He has been involved in over $1 Billion in self-storage transactions and is frequently asked to share his specialized expertise at self-storage industry conventions and meetings.