Self-storage is becoming such a part of the American culture that there is a new comic book coming out called “Unit 44”. The plot is that the contents of the storage locker of a secret government group on space aliens gets auctioned for non-payment, and then some of those contents are needed to save the world from an alien invasion. Apparently, the TV show, “Storage Wars” is not enough to satiate the American curiosity with self-storage, and what’s hidden inside those roll-up doors. There is something exciting to roll up the door on a self-storage unit and see what’s inside – kind of like the show “Let’s Make A Deal” from the 1960’s and 70’s, in which players bet on which box to choose to find the winning prize. I think the only thing left now would be a video game, but I’m sure that’s in the works somewhere.
Memo From Frank & Dave
Be Prepared For An Unstable Interest Rate Environment
The U.S. government is in a real bind. We are facing a shutdown of the Federal government as this newsletter goes to press, and it is a near certainty that “quantitative easing” will have to be eliminated in the near future, as the expenditure of $85 billion per month is not sustainable forever. So what will happen to interest rates when “quantitative easing” ends – and where are interest rates heading in the future?
The impact of the elimination of “quantitative easing” is not as big as people think
Interest rates have, historically, been a function of inflation. Treasuries, for example, normally come in at 2 points over inflation. With inflation at 2% current, interest rates should be 1 ½ points higher than they really are. That means that, when quantitative easing ends, interest rates should immediately advance by 1 ½ points. While that’s a jump, that’s not nearly as big an increase as most people think. However, that’s predicated on 2% inflation.
Inflation is the measure to watch
Interest rates normally match inflation increases point-for-point. If inflation rose from 2% to 4%, then interest rates would also rise by 2 points. So it’s the future of inflation that will have the biggest impact on interest rates, not the impact of the elimination of quantitative easing. Fortunately, for the moment, inflation shows no signs of any big increases, due to low natural gas prices and worldwide recession. But inflation rates are hard to predict and run in cycles normally.
Cycles in interest rate are a certainty, too
Just like inflation, interest rates also run in cycles from high to low and back again. The low rates that we are enjoying currently are not without historical precedent. But staying at any certain interest rate level – forever – has never happened. Interest rates go up and down, and there is every reason to believe that they will do so as a function of basic economics.
How to protect yourself
To protect yourself from interest rate increases, you should do the following:
- Only buy deals with strong numbers that can carry the burden of higher interest costs.
- Build an aggressive marketing system that can push rents up, when necessary to offset these costs.
- If you have a current note on a facility, try to renew it or extend it now, rather than later.
- Look to refinance existing notes into a conduit loan or other vehicle that offers a 10 year term.
Now is the time to take action, as it is hard to make these changes when it is apparent to the markets that higher interest rates lie ahead.
Higher interest rates are coming in the near future. This is not a reason to panic, but to make sensible decisions to hedge your exposure. Interest rates cycle as part of their natural economic forces, and you need to plan now for the potential of higher rates in the future.
Some Things Don’t Look Scary Until You Look Closer
Polar bears look fun from a distance. They look like balls of white fur. They even are featured in Coke commercials as friendly animals that just hang out and drink soda pop. But, of course, the reality is that they will tear your head off and eat you in 5 seconds. Due diligence is what protects you from polar bear situations. Good diligence involves looking past the glossy exterior and focusing on what really drives profitability: revenue, expenses, the market and property condition. Don’t be fooled by appearances. Just as you would not want to get in a cage with a polar beat – no matter how cute they look – you dod not want to get involved in a self-storage facility that is not profitable based on the price you’re paying. Ben Franklin once aid “diligence is the mother of good fortune”, and that statement was as true in 1750 as it is today.
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