The Appraiser’s Appraiser

Interview with guest Chris Sonne, MAI Cushman & Wakefield with Georgia Ragsdale CEO Watermark Financial.

Q: I’d like to start by asking you a little bit just about your personal success in your field and one of the things that sort of leapt out at me as I read your bio was that you’ve both worked very entrepreneurially and also in a corporate environment.  What do you see as the strength of being entrepreneurial versus the strengths of working in a corporate structure? 

A: Okay.  Well what I liked about being an entrepreneur is that I could wear shorts to work instead of a tie. 

Q: Okay! (laughter) 

A: I’d wear my board shorts and I was a mile from the Huntington Beach Pier and that was very nice because I could sort of manage my time and domain a little bit easier.  But what I love about the corporate world is that it’s a much greater opportunity for business.  We’ve been able to expand through our reacquisition of my firm Self Storage Economics by Cushman and Wakefield to do work world wide and to be exposed to much larger transactions.  Before we could do smaller portfolios with my team of seven but now with a team of twenty throughout the world we can do portfolios of a hundred properties or more in a very quick time frame.  So that’s been very good for business opportunities. 

Q: Help me understand a little bit about the econometric model that you’ve created. 

A: It’s registered with the library of congress.  It’s proprietary model and it’s a model that we use to forecast demand, stabilized demand for self storage.  So in other words, we can go into a trade area and using the econometric model we analyze whether a market is undersupplied, oversupplied or at equilibrium.  And that’s the first question in self storage.  “If I build this, will they come?” 

Q: Helpful! 

A: Also I will know what the stabilized occupancy is going to be and how that impacts my cap rates, my rental rates, my cash flow…all the key components of a successful self storage business.  Sometimes it’s interesting how, in the boom years, it was that fundamental factor which was most often ignored.  And now we’re doing much more work on that for people that are saying – even banks that are say “I want to finance this, but I really want to know where is this property’s competitive position in the marketplace and what’s going to happen over the next five years.”  And we can analyze if there’s new construction what the parameters are…so it’s a quantative model, but we also use our qualitative skills based on our experience in the asset class over the last ten years. 

An appraisal is an economic model that will lead you to a logical conclusion.  And it is an opinion because economics are a soft science. 

Q: In reality an appraisal should be logical and consistent and lead you to a reasonable conclusion. 

A: Now somebody may not always agree, they want a lower cap rate, other things… Still here’s a lot of consistency in the modeling and even the writing that will, if you use the model correctly give you a correct answer.  And there are usually a lot of inconsistencies that if an evaluation is off, an example is the relationship of expenses to cap rate.  There’s a mathematical relationship there that is easy to test.  And so you can see if there is a whole lot of conflict with the comparable data.    The market will tell us that using an appraisal model we can analyze the market to come up with a reasonable conclusion. Now there is a sense of…your experience as an appraiser, and all these things built to help you get there more quickly than the novice that begins to do an appraisal and that’s why experience I still think is one of the great schools of our business is to have a lot of experience in the asset class.  It helps to make good decisions. 

Q: A question on the sector itself, certainly we’ve seen just a huge growth in this sector and yet it still remains a sector that isn’t highly capitalized through the industrial players.  We see a very small amount of control of this sector through public entities for example.  Just kind of help us understand how you might see the self storage sector growing and changing over the next 5 – 10 years. 

A: That’s a great question.  Self storage is a highly entrepreneurial asset class.  It really rose as an asset class in the mid 90s when the REITs began to be noticed by Wall Street.  They were offering superior dividends and then other entities became capitalized REITS and so the public markets began to recognize it and they were recognized as a core asset class.  In the last ten years, self storage has been recognized by the CMDS world as a core asset class along with industrial property, office, retail, apartments.  And so the legitimacy of it really rose for investors because of Wall Street’s interest and lending to the asset class and then Main Street bankers sort of followed.  Instead of it being this funny little garage away from the garage, it became suddenly a very legitimate investment.  And consequently over the last ten years it’s had the lowest default ratio of all major asset classes on Wall Street, CMDS market and among the highest returns.   And so the investment markets the capital and equities become very interested in it.  But it’s origins some say that it started after WWII in Texas or somewhere in the southwest building these on odd shaped parcels of land they didn’t know what to do with, so they kind of built these garage things. 

Q: A humble beginning!   

A: The banks at first thought well wait a minute, you don’t have any leases!  But now it’s become a very sophisticated asset class over the last 50 years and it remains highly entrepreneurial.  You’re right.  20% of our self storage properties are institutionally owned such as the REITS or nation-wide owned corporations.

Q: Where is the opportunity?  

A: I do see consolidation in the next few years.  Already we see more of single entity, single unit transaction volume sales is really declining.  What’s happening is portfolio deals are being done, so larger chunks, fifty, and a hundred at a time. We just saw that an institutional group invested in a portfolio in the southeast with close to $200 million dollars.  So we’re seeing more institutional money come into play.  I see the bigger players, the regional players getting bigger, the REITS, the others acquiring, but even so, because the asset class is so entrepreneurial, 80% or so; it’s going to take a while. 

Q: Certainly we see a lot of innovation in the self storage sector through additional consumer oriented benefits and retail.  They are making it more consumer friendly, a lot more focus on safety and cleanliness and customer service. Is that a trend that you certainly think will continue to grow and expand?

A: Yes I do.  When people say it’s a retail business, what they mean is that, yes, it’s a management and customer based business.  And management on the operating side is key; almost half your operating expenses are management related for onsite offsite administrative costs.  It used to be the old retired couple with the blue haired lady and the smoker guy you’d walk in and “what’ll it be?” in a dusty facility, and now there are state of the art security measures, fire, life, safety cameras.  And management has become much more sophisticated and professional.

Q: You are someone who is on the cutting edge of your field.  What are the innovations in the appraisal process, how is your field growing and changing? 

A: Good question, no one ever asks about the appraisal process, its always seen as boring!  The key innovations are in interoperability.  It’s about data and data transference.  Use of technology. Our reports are highly complex and technical now.  We have invested lots of time and money in our data bases at Cushman & Wakefield.  We have consolidated data files.  We have and can tag over 100 data points, populate that into reports and then transfer this data to banks electronically that allows them to transfer it and populate it directly into their forms.  It eliminates time and possible human error.  It is much more efficient and then there are no mistakes!  It allows us to focus on the analysis.

Q: How are the long term fundamentals of property and property values in self storage?   We are pulling back from boom days of course.   

A: I am very bullish on Southern California long term.  What we are seeing is an exogenous pull back due to elements outside the fundamentals of self storage due to the credit crunch.  These are cyclical and structural, not fundamental.    We have not had capital credit crunches last for too long, I think that the capital will begin to loosen again in 2010.  90% of the CMBS market is off this year, but we will see a return.  Real estate has been an excellent investment since World War II, self storage in particular because it has the highest returns and lowest losses. 

R. Christian Sonne, MAI, MRICS

Managing Director Irvine, CA  R. Christian Sonne is Managing Director of the Self Storage Industry Group. An appraiser and real estate economist by training, Chris started Self Storage Economics in 2002 because of the growing sophistication of the self storage asset class and market demand for quantified self storage data and conclusions. Self Storage Economics became Cushman & Wakefield’s Self Storage Industry Group in 2006. He can be reached via e-mail: chris.sonne@cushwake.com.