5 Reasons You Should Sell Your Self Storage Facility
As an owner of self-storage facilities, you probably know how lucrative the industry can be. This becomes especially apparent when you try to sell your storage facility and realize that you could make much more money by simply selling it off versus operating it for years. However, convincing yourself to sell your storage facility can be difficult because of all the hard work you've put into it. Don't worry! Here are five reasons why you should sell your self-storage facility today!
1. Buyers are Ready
The U.S. self-storage industry is on fire with demand. According to Yardi Matrix, nearly half of the major markets saw a 10% or more jump in street rates in the past year. According to the research firm IBISWorld, the number of self-storage facilities nationwide grew to more than 60,000 in 2020 from around 47,000 in 2008. And according to Yardi Matrix, there are another 2399 self-storage properties in various stages of development. The performance of the self-storage industry and resilience during Covid has attracted many new potential buyers. In addition to the traditional buyer pool, new ones include real estate owners diversifying away from their current holdings to individuals looking to buy their first facility. As an owner looking to sell your facility, if your facility is priced accurately, you have a buyer ready and waiting for your facility.
2. Property Prices Are Higher Than Ever
Not only are residential and commercial property prices high, but as we mentioned above, demand for storage units is also higher than ever. Now may be a great time if you're considering selling your storage facility. With low-interest rates, commercial real estate prices are at an all-time high. As interest rates increase and more storage is available in your market, putting pressure on unit rental rates will negatively impact self-storage facility prices. It would help if you considered the pros and cons of holding or selling your facility before prices are affected. If you do decide to sell, you could receive thousands and sometimes millions in profit. It's never been a better time to sell self-storage properties.
3. Interest Rates Are Low
Interest rates have been historically low for several years now. With rates being so low, businesses and individuals don't have as much incentive to keep money in banks. High-interest assets are more attractive, even though they typically involve more risk. Soaring stock markets also play a part here — investors want to put their money somewhere, and they're not getting much bang for their buck with fixed-income investments like bonds or C.D.s. Even if you don't plan to sell your self-storage facility anytime soon, remember that interest rates won't stay at rock bottom forever. The Fed has already mentioned raising interest rates in the coming months. Real estate prices will be impacted when interest rates rise again. Remember that when investors and buyers evaluate investment opportunities, they allocate their capital to the option that will provide the highest return within their investment criteria.
For example, if a facility today has an NOI of $100,000 and is on the market at a 5 Cap, the asset is priced at $100,000/.05 = $2,000,000. When interest rates rise, the going Cap Rate for that same facility rises to a 6 Cap; the facility is now worth $100,000/.06 = $1,666,666 or 16.7% less than it was when interest rates were lower.
4. SBA Loans Are Increasing
According to the U.S. Small Business Administration* (SBA), both 7(a) and 504 loans have increased yearly and are at all-time highs in 2021. And many first-time self-storage buyers are tapping into SBA loans for their first deal. With more financing available, particularly with lower money down (sometimes as low as 15%), the buyer pool grows. It should be noted that to qualify for an SBA loan, the self-storage facility's net operating income must be able to cover the debt by at least 1.25. For example, if your debt payment per year is $100,000, the NOI must be at least $125,000 or 1.25. If the debt coverage ratio is lower than 1.25 the buyer has to either put more money down, if possible or lower their offer. If either one is not possible, they either walk away as they won't be able to secure SBA financing or will have to find other financings that pencils out.
Yearly distribution of SBA Funds
5. The Future Demand For Self-Storage Is Uncertain
The COVID-19 pandemic-related trend toward remote working drove a large number of families to relocate over the past year and a half, which in turn created new demand for self-storage space in many major markets across the U.S. During periods of uncertainty, self-storage often has a surge in demand, as we've seen in the past 18 months.
Part of the increase in demand, occupancy, and rental rates is that the sector's performance prior to the pandemic was lacking. It's easy to show stellar growth when your rates and vacancies were not strong in the prior period. When the demand slows down, so will the growth, and the industry will also have to face the underlying issue of the current development pipeline.
We hope that these five reasons why you should consider selling your self-storage facility today help you make a more informed decision about your self-storage business.