Self-Storage REITs 2011 Overview: Acquisitions Dominate the Market, Expect More of the Same This Year
|Copyright 2014 by Virgo Publishing.|
|Posted on: 01/13/2012|
By Amy Campbell
New self-storage construction may have come to a standstill, but acquisitions are on fire. After a couple of years of barely-there activity in the self-storage real estate market, 2011 was a banner year for buying and selling properties.
While there were some modest individual sales, the bulk of buying power belonged to the self-storage real estate investment trusts (REITs). Backed by strong financing, the REITs lit up the acquisition market in 2011.
Extra Space Storage Inc. acquired 55 properties in 17 states for approximately $289.6 million. Twenty-eight of the properties were purchased in the fourth quarter at a price of $189.9 million.
Strategic Storage Trust Inc., a publicly registered non-traded REIT, ended 2011 with an estimated $245 million in new acquisitions. The most recent included 12 properties in Georgia and Florida, totaling approximately 8,000 units and one million square feet for a total aggregate purchase price of approximately $80 million.
The other three publicly traded self-storage REITs—Sovran Self Storage Inc., Public Storage Inc. and CubeSmart—also had their share of acquisitions last year. In late fall, CubeSmart purchased the N.Y.-based Storage Deluxe portfolio, which includes 21 facilities and a site under development, for $560 million.
REITs weren’t the only ones making real estate waves. Another large acquisition belonged to CPA: 17 – Global’s purchase of nine A-American Self Storage facilities. The company, an affiliate of investment firm W. P. Carey & Co. LLC, paid $46 million for the properties, located in California, Illinois and Hawaii.
There are many factors contributing to the sudden influx of real estate activity. In the past 12 months, lending institutions have begun to release their tight grip on funds, enabling those with financial fortitude to move forward. In addition, many self-storage operators held onto their properties during the slow real estate period between 2009-10, waiting for a more favorable market in which to sell. “2011 represented a market returning to normal. The next several years are likely going to look a lot like 2011,” said Tim Martin, chief financial officer for CubeSmart.
With more than $1 trillion in commercial loans expected to come due in the next three to five years, operators are contemplating their long-term plans. “Many owners will be looking to sell as their facility may be performing fine, but the refinancing scenario may require additional equity investment,” Martin said. In addition, owners with a “variety of capital sources will continue to acquire properties,” he adds.
REITs Shine in Commercial Sector
Self-storage REITs posted a total return of 35.2 percent, the strongest gain of any REIT sector for the second consecutive year, according the National Association of Real Estate Investment Trusts (NAREIT). The results outpaced the 8 percent return for all REITs, as measured by the Dow Jones All REIT Equity Index.
“There are a few factors that contributed to the sector’s strong performance,” said Diane Piegza, vice president of corporate communications for Sovran Self Storage, which operates under the Uncle Bob’s Self Storage brand. “Certainly, the lack of new construction benefits the existing supply as well as our ability to keep expenses in check. Self-storage operator’s expense challenges pale to those faced by higher-end property types.”
Another key component for last year’s performance was the reduction of the use of concessions, Piegza said. “Many operators moved away from the aggressive offers of 2009-10 and returned to more traditional discounts. Not only that, but we are seeing the return of need-driven customers as compared to the more discretionary user of the mid 2000s. Put the two together and you’ll see positive results.”
Regardless of the economic highs and lows, self-storage is and will always be a need-based product. “Based on this, we’ve proven that, while not recession-proof, storage is to some extent recession-resistant,” said Clint Halverson, vice president of corporate communication and investor relations for Extra Space Storage. “People find that life events do not stop. These changes that people experience drive the need for storage. The events taking place may shift, but the demand for the product has remained consistent.”
Many feared the decline in new-home construction over the past three years would result in fewer people moving and less storage demand. That’s not the case, Martin said. “What they may have missed is that as home ownership has declined, the population of renters has increased. People who rent move more often and often use storage as an ongoing solution for their lifestyle.”
The overall sentiment is 2012 will be a good year for REITs, Piegza said. “While I’d like to think the self-storage sector will outperform the others, I expect we’ll see some strong competition from the multi-family and lodging sectors as the economy strengthens.”
Regardless, if self-storage continues as the top-performing REIT sector, all signs point to another active year for acquisitions. “Certainly, the larger players have the capital and the appetite, but the quality and pricing of the properties on the market will play a key role in acquisitions,” Piegza said.
Sovran, Extra Space and CubeSmart also claim new self-storage development is simply not feasible at this time as many markets are simply oversaturated. “There is plenty of inventory out there,” said Martin, who expects the consolidation to continue through ownership/acquisitions and third-party management.
And while reducing concessions will continue to be a challenge in the majority of markets, the REITs expect to see modest increases in rental rates this year. “Occupancy and concessions should remain at more customary levels fluctuating with seasonality and demand,” Piegza said. “The majority of concessions—at the least in the short term—will remain in parts of Florida, Texas and the Gulf Coast. Ultimately, operators who have a strong Internet presence, employ call centers, and draw on solid revenue management practices will reap the largest rewards.”