For the last 27 years, Argus has reported our market findings honestly and with an acute sense of what we are experiencing in the 100+ self-storage transactions that we are involved in each year. For the first time in my 15+ year history at Argus I find myself wondering why self-storage values are growing at such a rapid pace. With all of the hype surrounding self-storage (a renewed buzz about development, very strong market fundamentals, fluid financing options, and all-time high values), it’s worth contemplating; is this as good as it gets?
We have been talking about the uncertainty of this self-storage valuation boom for over 10 years now, including how long it will last and the impacts of major driving factors such as interest rates, new development, consumer and demographic trends, and overall market fundamentals. For now, all signs are pointing to GO! However, in this high-stakes game of musical chairs, NOW is the time to think outside the box and find your chair before the music stops. This is the time for serious analysis of your personal objectives, your investment tax positions and financing options because the real estate market, tax code, and credit market are likely to change quickly and limit your options moving forward.
By most measures, the self-storage rental market is booming. We have recently seen a very large increase in move-ins and vacates have continued to be very low by historical standards. We are heading into the leasing season with historically high occupancy and it is setting up to be one of the best leasing seasons in recent history. According to industry reports, we are finding that most rental rates are also strengthening and that has given the investment community the shot of confidence needed to push values even higher. For the first time in Argus’ 27-year history, self-storage is truly being priced at CORE real estate levels. Cap rates for stabilized, institutional quality assets in major markets (top 50 MSAs) are falling in the 4%-5% range and secondary market cap rates are not far behind. There has also been a renewed interest in C of O and lease-up deals and new development seems to be gaining momentum after a very brief slowdown during the pandemic.
While it is comforting to know how well self-storage has prospered in recent times, several questions hang over the future. Wondering if high values will last forever is really just a manifestation of wishful thinking, and can probably be answered best by the statement: They never have! The more typical historical range in values, occupancies and lending options will inevitably resurface, leaving many owners wishing they capitalized on the current market today.
How should you move forward? First, decide what you want to do and the details of your investment (current tax position, operating performance, financing restrictions, submarket fundamentals, capital improvements needed, etc.). If you want to keep your property for at least five years or more and believe that your competitive situation is such that you can maintain and grow your income over time, then make sure that you have captured a low interest rate loan for at least your investment horizon, plus 2-3 years to give you some wiggle room. Be wary of prepayment penalties that may prohibit you from selling, because you never know when you might change your mind. If your ownership horizon is less than five years or you are concerned about your property’s long-term ability to compete in your market, then selling could be an attractive option today. Values are at all-time highs and the chances of cap rates going up (values going down) appear to be significantly greater than having cap rates decline any further. If you are wondering when to make the decision, my suggestion is to do so only as soon as you are comfortable. While no one has the ability to predict where the investment market will go over the next several years or where values will be a year from now, we can be sure that the “best of times” won’t last forever.
Ben Vestal, CEO of Argus Self Storage Advisors, can be reached at 800-557-8673 or firstname.lastname@example.org.
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