Market Update with Matt Bilger

Foreign. Welcome back. Today we've got a guest that we've had on, I think this is his third or fourth time with a market update.

Matt Bilger with Collars International. He's a commercial appraiser, does multi family and self storage. I know there's two main assets, but he does others as well. Matt, welcome back, man. Thanks for having me. I appreciate it. Appreciate you coming on again. Appreciate your time here.

So we were talking a little bit offline before we came on and something that stood out was related to self storage. You said you average around, what was it, 75 appraisals a year. 75 self storage assignments for the last one to 15 years. Yeah. And last year you did about half that. Yeah, yeah, it, the market has definitely shifted. You know, there's quite a few factors that have caused that and you know, it's, we're not gonna, we're not gonna break any, any news here.

You know, interest rates have made it harder to get loans. Banks are underwriting more stringently than they have in the past. Interest rates are higher. So a lot of deals that penciled out and made sense back in the day of cheap interest rates, you know, they, they don't, they don't make as much sense today. And so you're not going to see those get, get those, see those, get loans. You know, I, I've. The market's still humming along. As I said.

Most of my work has been on the self storage side, has been probably class B and C assets, you know, local and regional investors. Nobody's refinancing right now unless they have to. So it's, we're just not seeing that repeat business that we saw for a lot of those 75 deals a year were jobs that I'd appraised again and again and again because, oh, interest rates went down yet again. I can shave off this much on my monthly payments by refi. Why not? So we're not getting any of that.

You know, there's, there's a few regional slash national buyers that are still active. I know around here, mini malls, buying some stuff. They went on quite a tear a couple years ago. It was just a year or two ago, but, you know, I'd say most, I have some notes on this. Most, most large investors, you know, they're, they're just keeping their powder dry. They're, they're waiting for the deals that they want and then they'll bring that cash to bear to win it.

Do you, do you know, in this, I don't mean cut, you off. But do you know, and I've, I've talked to three brokers in the past two weeks. It seems like they're all over the place. But do you have any idea what buyers are looking for as far as the type of asset class?

Because I, so I've heard, I've heard this, I've heard some buyers are looking for smaller kind of what you just said, Class B, Class c. So maybe 10,000, 15,000 square foot facility as opposed to maybe you've got four or five of those together. Buyers seem to only want one of those as opposed to a package. So have you seen any trends like that or anything on that front? Most of the stuff that I've been doing, I have not seen as much portfolio work.

There's still some of that, but I've been seeing more of the one off assignments. We've done some portfolio stuff but it's, you know, you'll, it's not uncommon for, for owners to package deals and they'll, you know, they may have, you know, one diamond in the rough that's used to basically unload several less desirable properties. That's not uncommon. That's been happening forever. So you know, that's still happening.

One thing, and this is a little bit dated, but I know that for a long time like Public storage was very interested in buying portfolios because they just wanted market share. And, and I know like U Haul and some other place, you know, extra space like the Life stores, you know, they, they all wanted to be, you know, they just wanted to gain market share.

And so what they would often do is, you know, if they could, if you were an owner that had a handful of small properties in a, in a market that normally wouldn't excite a large institutional investor by, by throwing these all together, it's like, okay, well you're actually going to be able to buy you know, you know, a thousand units or something like that, you know, because we're, we're adding all these smaller properties together and that, that's something that, you know, these bigger buyers

would find enticing. So I, I know I have seen some of that, but not as much lately. Gotcha. Gotcha. Yeah. So pick up where, where you left off there? Yeah, kind of. It sounds like 24 was still kind of slow. Maybe tail end of 24 picked up. Sounds like with apartments you picked up a little bit. Yeah, I, apartments have been really strong. I benefit from being in Columbus, Ohio, which is one of the fastest growing metros.

Depending upon your source, it's the fastest or like second fastest growing in the Midwest. You've got intel, you know, everybody around here knows about that. But you've got so many other really great things happening. It's kind of Ohio is getting the, what Silicon Valley of the, of the, of the heartland moniker. I think there's something to that. There's a lot of, there's a lot of just growth and industry that's coming in here. Columbus has always benefited from.

It used to be called like a quarter city because like 25% of its like workforce and you know, 25% of its economy was state government, 25% was like Ohio State, 25% was industrial, 25% was like commercial sector. So it's a very well diversified city and that's helped it grow. When you've seen, you know, Cincinnati and Cleveland are growing, but not to the same, not to the same level.

We had a, at the end of the year, we had a, an Appraisal Institute conference that basically just talked about a year in review and what they were expecting for 2025. And you know, they had some economists on and basically it was a. Ohio was a tale of two cities. It was basically, he said, I'm going to show everything for Ohio with Columbus removed. And then I'm going to show Columbus and then I'm going to show them together.

And, and basically because he's like, the stories are so different that, you know, he was like, I'm just going to separate them and then I'll combine them later. But yeah, we, because of that, I have been lucky to have stayed very busy with multi family in the meantime. So. Yeah, no, that's good. So we talked, I think it was June or July. It seems like we've been pretty consistent doing beginning of the year, middle of the year cap rates. Have they, have they gone anywhere?

Do you see them going anywhere? What are you seeing with cap rates? This has been probably the hardest time for me in, in the, in all the time I've been doing self storage. It's the hardest time for me to estimate cap rates. Because it's been over 20 years, right? Yeah, yeah. I've been 20, 25 focusing on self storage for about 15 to 20.

And I used to, I could call a bunch of different brokers and I would always get the same, the same answer basically within maybe 25 basis points, maybe 50 different tops. And as I'm calling guys and talking to them, I'm getting different answers and I really haven't ever had that before. So depending upon what the report needs, that's that's the guy quote, just kidding.

But, but no, I have, you know, so like I talked to a guy recently and he was saying that you know, if your properties in lease up your cap rate's probably 7 and a half to 8. If your property stabilized it could be anywhere between 6 and a half to 7 and a half. That said and so that's, that's quite a bit higher than what I'd heard, you know, before, you know, when I was still seeing occasionally things in the, in, in the upper fives.

I'd say if you have, if there's like a really great class A asset that's stabilized with proven history, you might be able to get sub 6. But generally speaking I think low sixes is the best you're going to do right now. So most of your stuff is going to, I don't think that the broker that I talked to recently is wrong when he said that, you know, six and a half to seven and a half stabilized and higher for non stabilized.

When doing an appraisal we're often forward looking and we're, we're thinking about it on a stabilized basis. So that has some impact on what cap rates we'd actually use. But they've definitely, they've definitely been trending upwards. So and at the, we went to a self storage like regional conference and make sure I got my number, my right numbers here. The general consensus that came from there was that they expect cap rates to remain flat in 2025 even with consideration of Fed rate cuts.

Maybe by the end of the year we might see cap rates begin to fall a little bit if, if you know, rate cuts continue and inflation stays low. Yeah and I would, and I'm by no means an expert but I would agree with that too because well the Fed, the Fed cuts aren't really impacting commercial assets or affecting more shorter term loans like car loans, stuff like that.

So at least for mine they're following sometimes prime I guess sometimes but it's more Treasuries and I don't see the Treasuries they've ticked up. I don't, I don't know if they're gonna go down at all rest of this year. I don't know. We'll see. Yeah, if I, if, if I knew. That you'd be doing something else. Yes, that's right. Yep. So what, what else do you see and have you heard for, for the future?

Yeah, so couple of things I guess I'd say that let's talk about since we were since we were talking about inflation, you know, let's talk about that double edged sword a little bit. I say it's a double edged sword for self storage owners because on the one hand, you know, it's going to hurt discretionary spending and so that could hurt with new tenants, you know, may hurt with some existing tenants as they look to make cuts.

But generally the thought is, is that on the other hand the inflation will help, may help with rent increases because everywhere you look you see costs are going up, Costs are going up and so people are just expecting prices to increase. And so if you, if you are, you know, listening here and you're thinking about doing a rent increase and you say, all right, you know what? I'm going to do a rent increase. And your, your tenant complains, why are you doing it?

Well, look around, you know, inflation's up, everything costs more. You know, I'm just trying to keep pace. Well, insurance, insurance costs go up like 20% a year. Yeah, right. And as a business owner you have to make that up somehow. Right, right. So, so there, there's, there's thoughts that it, like I said, it's kind of a double edged sword as far as physical, that we talked about. Physical lease up. So fewer developments for all the reasons that we talked about.

Not as many transfers happening, but for properties, some properties are still getting built and for the ones that are during the boom days, it would be 12 to 24 months of lease up. You know, nowadays physical lease up is still 24 to 36, which is what, 36 months, which I've been quoting for years. But the difference is, is that there now more than ever is a really big difference between physical and economic occupancy. That's, that's where the difference is.

And so the thing that we heard from the trade show is that, you know, the big boys, they are happy to sacrifice dollars for occupancy. And the general MO is that they're going to offer all kinds of specials and they're going to, you know, public storage got famous, you know, on their, you know, first month, a dollar, you know, and so all these places, first month free, first two months free, whatever.

And so they are offering, you know, usually a third to half off rent until they get to about 70 to 80% occupied. And then at that point they will start increasing rents and to the tune of about 3 to 4% every three months. Okay, and so that's what I thought. That's, I've seen and heard a lot more than that. Yeah, yeah. And, and Certain. I think this was just like one. This was one of the biggest. I can't remember exactly which player it was, but it was one of the big dogs.

And that was kind of their. That that was their target. But certainly places where they can do more, they will, sure. And so, but, you know, the market will determine that.

So I think I'd said, you know, if you are a, you know, if you're an owner and you're competing against a big dog class A facility or, or just a, you know, public space or, you know, one of the REITs, a place for you to differentiate yourself is to simply just offer a rate, even if it's higher, but guarantee that you'll keep that rate for 12 months.

That, that's, that's always when, when smaller owners are asking me, that's one of the first things I tell them because, you know, I'm an owner and when I've had, you know, renters come up to me, potential renters, and, you know, say, if you can just tell me, like, I'll pay you more if you can just keep. I want to budget. Like, let me budget and don't surprise me with a rent increase every other month.

And so that's, that's what we do, you know, and so that, that's a place where you can differentiate yourself. The. So if, if it's 24 to 36 months for a physical lease up, how long is it taking to get economically stabilized? Most owners are, we're quoting 36 to 60 months and then some, and maybe even 72 months. So, so you're talking in excess of five years once you start lease up. So, you know, that's such a long project. That's a very long. Yeah, that's a very long time where you're building.

You could be, you could, I mean, you could be in planning for three to four years. You could be a decade before you're somewhat stabilized. Yeah, so it's, you know, but I mean, that, that's, that's the different mindset between, I would say the, the, you know, local and regional investors versus the national investors. You know, like I said, they're, they're sacrificing dollars for occupancy. They just, they just want bodies in there or, you know, they want stuff in their units.

And then they'll, you know, just creep those things up as they can, even if it takes longer. Because the other thing that came out, I mean, there were two things that, that were up. Length of stay has increased. It kind of been, you know, for the longest time, as you know, about a year, was kind of the average. They're saying that I don't remember what the number was that they had quoted, but it's up above a year, so that's good.

The other thing is the ecri, which I've talked about before on this podcast, that's. That's existing current or. Or existing customer rent increase. And that's just. Even though you're seeing discount rates to get people in the door and the web rates and everything is so much lower than they've been in the past, they're continuing to grow the rents for existing customers. So that's where they are seeking most of their growth, and that's continued. So, you know, that.

That's why none of them are panicking really, because as long, as long as they're continuing to have their existing customers continue to pay increases and not leave, those are the things that allow them to give the new guy, you know, two months off, two months free or whatever, you know, so.

And I've seen, I've seen occupancy drop with mine, I don't know, at least around 5% since probably October. And it seems to follow majority of people that I talk to kind of nationwide. I've got one buddy that's. He's more rural, he's in really small towns. He was like, yeah, I haven't dropped at all. But he's in towns with 500 people, 2,000 people. Do you have any occupancy trends? I don't know if you track that or not. It's. So we do.

I don't have the numbers off, you know, on hand, but what I would say is that we were regularly underwriting vacancy probably, or, you know, we were. We were suggesting, I. We were concluding to maybe, you know, 93, 92% on the upper end down to maybe like, you know, 85% on the lower end for years. I think that has retreated a little bit. I don't think. I don't think you're going to be below 80% on stabilized occupancy really anywhere.

But it's more common for us to be closer to like 85% and have like a 15% vacancy all in. That's physical and, you know, economic. On our stabilized number from where, you know, it was very common for us to be at like, you know, 7 or 8%, you know, just a couple of years ago. So. But, but as I've often stressed, this industry is all about pockets, you know, and if you're, if you're Three to five mile radius is strong, then it really doesn't matter what's going on nationwide.

So we always, that's why when we're doing appraisals, we spend so much time digging into the local area. Because it's doesn't matter what's happening nationwide. It doesn't matter like if I'm doing something in Columbus, it doesn't matter what's happening in greater Columbus. What matters is what's happening in your neighborhood. And so, you know, we pay a lot of attention to that.

And if the property is doing well and has this has good history or if, even if it's a new build and the market, you know, all your comps are well occupied, you know, we're not going to hit you, you know, punish you, you know, be punitive because the overall market or the, you know, the national averages are, you know, on vacancy are up, you know. So I don't know if I've asked you this, I want to get your take because I'm sure you look at a ton of numbers.

So square foot per capita, which I'm sure is a metric that, that you, you know, you put in your appraisals. Yep. Do you see obviously the average is 7 to 8. Do you see that being the average now? And do you run into anywhere, you know, maybe it's 15, 20, 30? Because I've got some that are pushing 30 for the town that I'm in. Demand's super high. Yes. So do you see variables there? Do you see that seven, eight is pretty consistent. Seven to eight is the national average.

I think that's also the average for Ohio and a lot of the states around here in the Midwest. But I always stress that that's just an average. And so it was kind of, I may have used this analogy before, but I always, and I'm dating myself, but I always kind of compare it to when intel was always putting out their new computer chips. It's like this has, you know, a thousand megahertz. This has, you know, it was always like, well, it's faster, it's faster, it's faster, it's faster.

And that's the metric by which you should judge how good your computer is. And then suddenly they're just like, oh no, that doesn't matter anymore because now we got dual core processors and quad processors and eight processors. We got all these other things now. Speed doesn't matter. That's kind of what's happened here in the self storage world, which I think is good because the self storage world is growing up, a lot of lenders were really uncomfortable with storage for a long time.

I mean, it's hard to remember back then because it's a darling of the industry now, you know, and so, and it has great returns and it's, it's, everybody loves storage, but there was a time when it wasn't so loved and it was a new product and everybody was confused and befuddled by it. And so, you know, professionals like me, we, we ended up pushing the narrative on, you know, the, the, you know, saturation analyses and how many, you know, square feet per capita, you know, in this area.

And we now find ourselves much like the, the advertising executives for intel, explaining that speed doesn't matter as much anymore because at the end of the day it comes back to the fundamentals of supply and demand. And whether you are above or below the average, if your occupancy is good and rents are holding, who cares, right?

You know, and so I have, after, after, you know, beating that to death for years, I finally have had to kind of start to retract because like you said, I would be appraising properties regularly. Where we're at, you know, 10 square foot per person, 15 square foot, 20, 25, I think, I don't think I've seen, I've broken 30, but I've seen like 28 I think was the highest I've seen. And I would have bankers say to me like, this is scary, like this is way too much. It's like, is it though?

Because occupancy strong, rents are strong, clearly the market is supporting it and at the end of the day that's what matters. And so we honestly don't know what the lid is. Eventually we'll find it, but I don't know where it's at and I don't know how much longer we have until we reach it. But I think that we still show that metric in our reports because we've trained our clients to expect it. But I don't put the weight on it that I used to. So it's still something we show.

And if, and if it falls within the traditional metrics, hey, everything's good and everyone's comfortable and everyone's happy. But if it doesn't, then I have to just do a little more explaining that it doesn't. But that's okay. It has a lot of competition. But you know, on the one hand that again, another double edged sword. On the one hand, yes, there's a lot of competition, but on the other hand there's a Lot of competition.

But your, but our property is maintaining rents and has strong occupancy. All this competition is going to do is deter future competition from entering this market. So you know, because it's, you know, you have someone looking, you know, you guys constantly looking for sites, site selection, trying to find the next deal and it's like, oh well this area has 25 square feet per person. Oh, I don't want to enter that. I don't want to enter that market and just get lost in the shuffle.

I, I, here's one where, okay, it's 10. Let, let's go there. Or wow, a place that's five, let's go there for sure. So yeah, it's, it's, it's like I said, it's not, it's not the be all end all that it used to be for sure. For sure. So what, what else are we missing here? What else can you give you give us, you know, to either what trends you've seen or something going forward? I'll return to some of the brokers I've talked to.

One thing that's changed is that listing times have increased.

Part of that has to do with, part of that has to do with buyers and sellers still having a big gap between what they want, you know, and so I'd gotten like, it's also become really common for, for some of the brokerage groups where it's like they'll just, they've got like their, their list of like their top 25 buyers and they will do like a, a soft listing, you know, where they'll, they'll shop it out there to the top buyers in the industry and those are the only people that see it.

And so it doesn't ever like technically get listed or if it does get listed, it's only after it's already been shopped around. All these people I've seen list times quoted anywhere from like three to six months to nine to 12. Because again, for the first time in my career, brokers are all over the place. So they're not all telling me the same story. So they're not telling sellers the same store either.

Because I've talked to three in past couple weeks that, because I'm still have portfolio that I wouldn't mind selling and different story from all three of them. Yes. You know, I, I've heard some where it's like, oh well I've even heard like 30 to 90 days. But it's like, well I think it has to be priced pretty aggressively to get that and it has to be a pretty choice asset or cluster of assets. So, yeah, I, I think that 2025, it.

Reading the tea leaves, everything I've been getting is that it's going to kind of continue to put along. Like, I, I don't expect big, big shifts in cap rates. I don't expect a huge, you know, change. And because of that, and because of, you know, interest rates not really changing the cap rates, I just, I just expect it to kind of remain status quo where, you know, most of the volume, most transactions are going to happen between local and regional investors.

You know, again, the large investors will, will save their powder for the choice assets that they really want, you know, and maybe by the end of the year we'll see, see some fluctuation with the cap rates. But, you know, there's, there's a lot of, a lot of question marks and, you know, my crystal balls as fuzzy as everybody else's. Yep. No, I think, I think you hit on a lot of things that I think is true. I think people, whether big, small, whatever it is, are sitting on money.

They have some money, but they're, they're not going as fast. I don't know if it has so much to do with interest rates. I think people are one. I think people are playing catch up with operations. I think that's part of it because so many people grew so fast in the past, you know, since 2020, including large institutions, to where, you know, they're still trying to catch up with operations. So I think that's some of it. But I think people are just trying to be smarter with, with buying too.

I don't know. So what, what else you got for us before we go here? I think that's, that's pretty much it. As I said, there's, there's just it. I've seen a major slowdown and I, I'm hoping that this year will. I feel more positive about this year than I did a year ago. But do I expect my, you know, like I said, my volume got halved last year. Do I expect it to double this year? No, I don't. If I can, if I can match last year and then get a little bit, I'll be happy, but, you know, we'll see.

Really. The only other thing I'd say on my end is I'm happy to help. If any of the people watching this are, want me to give an opinion on something that they're, that they have or that they're looking at, I can't give valuation in advance. That's a use path violation. But, but I can certainly talk to you about project that you have or that you're looking at. It's Matt bilgerallyours.com Feel free to reach out. We also have a, usually it's a quarterly newsletter.

I actually have one that's, that's ready to go. So I'll be dropping that in the next day or two. I think. I'm actually a week behind on that, but we'll get that up. And yeah, I'm always happy to help. So feel free to reach out. Yeah. And I highly recommend Matt, especially if you're in Ohio. You've got some commercial asset that needs appraised. Highly recommend him. I know you've helped some other people that in neighboring states as well, but yeah, absolutely.

You're in Ohio. Yep, I can do work in Ohio and all the states that surround it. I'm licensed in those states and but Colliers has the premier self storage team across the country and if it's not me, I can find somebody that can help you. It's awesome. It's awesome. And before I forget, Matt, don't sign off right here after we, after we sign off. So Matt, again, appreciate you coming on, man. This has been super insightful. We'll continue to track the market and, and see what happens here.

Appreciate you coming on, man. Thanks for having me. See you guys. Thanks for following subscribing and listening to this episode of the Do More podcast hosted by Jon Farling. To learn more or ask questions, go to L4Investing.com.