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Thursday, May 24, 2012 Five Questions With...
CREF: How did you get into the real estate business? MS: My interest in the real estate market began in the 1990s when I purchased my first home in New York. This was a time when the New York housing market was going through a financial crisis in which banks and partnerships were failing. Due to the fact that the home I purchased was a foreclosed property owned by Resolution Trust Corp (RTC), the transaction became extremely challenging where three sets of lawyers from all sides were involved in the negotiations. Finally, the deal closed but only after the attorney "quick claimed" the property over to me. About 24 months later, I sold the property resulting in a significant upside. I decided to ride the wave and started purchasing and selling residential real estate on a personal level. I officially made my mark in the commercial market when I joined Triple-Net Properties (now an indirect subsidiary of Grubb & Ellis Company) as Managing Director of Private Structured Offerings. CREF: Why did you decide to specialize in the self-storage industry? MS: After completing research on this asset-class, we realized that we could capitalize on the strategic advantages of the self storage industry, which is driven by human life factors and change such as birth/death, marriage/divorce, retirement, military enlistment, job relocation, business expansion and contraction. Since this industry is extremely fragmented, we saw this market as an opportunity for another self-storage player but not just on the acquisition/property management side but in terms of raising equity. Self-storage cap rates tend to be 1 to 2 percent higher than other commercial property types such as retail, office, industrial and multi-family. The good new is that our non-traded REIT is not subject to the daily (and sometimes wildly) pricing fluctuations of the stock market and it is considered by many to provide the distinct benefits of consistent cash flow with the potential for growth. This comes at a time when many investors are looking for alternatives. CREF: How do you think the market looks over the next 12 months? MS: Like all property types, the global financial crisis has and will continue to have a significant impact on the self-storage industry. With debt markets in turmoil, most buyers of investment property simply cannot find financing. In addition, today's lenders are unlikely to lend to even stable firms with conservative buying structures coupled with high net worth backing. Over the next 12 months, the market could be seen as the best of times - if you don't need debt or the worst of times - if you need debt. We are causally optimistic. For us, change is good and this is certainly a time of change. CREF: How has the self-storage Industry changed especially in the current market? MS: The self-storage industry is constantly evolving and the last year has been no exception. If anything, we are seeing greater change than ever before. The debt crisis has certainly been a factor. The credit crunch has not hampered the self storage sector nearly to the extent that it has sent the residential market reeling, but it has slowed transaction velocity significantly. We are seeing cap rates increasing throughout the U.S., with some markets more impacted than others. To some extent, that has been a positive for buyers like us who have the ability to purchase properties all cash. The marketplace is less crowded and we are getting a second look on properties where the highest bidder could simply not perform. That said; this is an asset class that typically benefits from good cash flow and has few distressed sellers. Many owner/operators are fiercely independent and would rather continue to hold the property than sell below their target price. They can afford to. The only exception we see is in the case of a property that is in lease up and under pressure from their lender. In general, we are not seeing distressed buyers. They can afford to sit tight and they are doing so. That makes for a more stable marketplace. CREF: How has financing for self-storage properties changed? MS: Financing remains the most difficult obstacle. We have seen lenders who have changed rates at the eleventh hour and sellers who balked at closing. Buyers and sellers need to be more creative with assumption of existing loans and seller financing now part of the discussion, where in the sellers' market in recent years, it was not even contemplated. There will be a continued migration from single property ownership to greater representation by the regional players and national REITs. Filed Under: Five Questions With... E-mail this article to a friend | Printer friendly format| DIGG this| Post to del.icio.us Comments on this article
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