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Managing Risk: Interest Rates

Written by: Ben Vestal Posted: 9/30/2016
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Change and uncertainty go hand in hand, whether it is the looming Presidential election or the impact that a new administration will have on the stability of the economy. As we approach election season, many are adopting a “wait and see” policy when it comes to evaluating the market for self storage investments. We know that one of the biggest risks to your self storage value is a potential increase in interest rates. This risk has been looming in the background for years, but as our President will inevitably change, so too is the likelihood that rising interest rates will have a meaningful impact on the value of your investment.

Interest rates are the most unpredictable aspect of the equation today. In fact, I have quit predicting whether interest rates will go up or down because I have been wrong for the last 10 years!

We have seen upward pressure on the 10-year Treasury over the last 30 days, but it is unlikely that there will be any meaningful movement before the elections. After last week’s Fed meeting, it is clear that the Fed will continue to keep pressure on lower rates even with the recent CPI index coming in at 2.3%, which is up from 1.8% a year ago and is higher than the Fed’s target of 2%. The Fed says it is willing to tolerate a period of time in which inflation is greater than 2% if it will help ensure that full employment is achieved. The smart money is on the Fed standing pat, but the information as of late gives much needed ammunition to the Fed hawks as they hope to raise interest rates sooner than later. However, the looming Presidential election and effects on the investment market will inevitably keep a lid on interest rates for the time being.

Because of this, I believe it would be prudent of self storage owners to extend their debt maturities as long as possible and eliminate or lower their prepayment penalty on their existing loans. In order to accomplish this, you may need to pay a slightly higher interest rate (20-50 basis points) but I believe it will give you the necessary flexibility to position your asset for maximum return.

About the Author

Ben Vestal is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self storage. Argus provides brokerage, consulting and marketing services to self storage buyers and sellers. For more information, call 800.55.STORE; e-mail bvestal@argus-realestate.com.

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