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 it’s worth contemplating; is this as good as it gets?
We’ve been talking about the uncertainty of this self storage valuation boom for 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.
While it is comforting to know how well self storage has prospered in recent times, several questions hang over the future.
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 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
Argus Self Storage Advisors
