Investment Opportunities in Self-Storage: 5 Keys for Owners/Sellers and Investors/Buyers
Copyright 2014 by Virgo Publishing.
By: Ben Vestal
Posted on: 02/17/2012



 

An optimistic outlook for the self-storage transaction market means great opportunities for industry buyers and sellers. The year ahead should see great equilibrium, with buyers and sellers coming together on lucrative deals.

As 2012 picks up momentum, the self-storage transaction market is showing signs of equilibrium, which hasn't happened in the last few years. It appears buyers have regained confidence. They're being more disciplined with their assumptions, and they're willing to move forward with acquisitions that push the envelope of historical underwriting parameters.

This is largely due to the increased sophistication of many self-storage operations and the overall perception of lower risk in today's market. As demonstrated in the accompanying chart, the self-storage real estate investment trusts (REITs) outperformed all other REIT property types last year. The chart is just a snapshot of how the overall industry performed in 2011, but it has added fuel to buyers’ confidence, which will continue through 2012.

Self-Storage REIT Returns 2012***

Self-storage owners are seemingly confident as well, with many of them happy to simply operate their property, with little or no motivation to sell. Most have survived the recession, and with minimal new product being built over the last few years, they're enjoying increased occupancy and firmed rental rates. Owners will continue to enjoy occupancy and rate growth this year due to sound fundamentals and the lack of new competition.

The outlook for self-storage is one of optimism. Below are a key points and opportunities for self-storage sellers and buyers in today’s market.

Sellers

Single-asset sales are at the highest level since 2007, according to data provided by CoStar Group, a commercial real estate information company. In addition, pricing is at the highest level since 2008, with an average price per foot of $72.96 in 2011, according to PricewaterhouseCoopers LLP.

Increased interest in self-storage investment is expected to continue. This will keep the capitalization rates down and prices near historically high levels as new investors continue to enter the industry.

U.S. capital-gains taxes are close to an all-time low. No one knows what will happen to the U.S. tax structure, but with an election year upon us, taking profit when capital-gains taxes are so low isn't a bad thing. It's worth calling your accountant to see what your after-tax proceeds would be under the current tax structure. You might also want to see what your after-tax proceeds would be if the capital-gains tax were to increase 5 percent or 10 percent.

While most self-storage investors are focused on class-A facilities, the intense competition for these assets will drive the prices higher for class-B and -C assets in the year ahead.

Over the last few years, the focus has been on risk aversion. The key component that seems to inspire buyers and their lenders is “core” or “core-plus” assets and low leverage. With a new fiscal year upon us, buyers and lenders have received their annual allocations and should be more receptive to transactions in the “grey area” compared to what we’ve seen over the last few years.

This leads me to believe this is the year to "make it happen." Asset prices will be pushed higher by an increased demand from self-storage buyers. All of this reminds me of the old real estate saying, “It’s better to buy a year too early than a day too late.”

Self-storage owners should take a hard look at their investment goals. You'll make more money if you sell when the time is right than just renting more units and improving operational efficiency. The REITs and other large institutional buyers have access to a tremendous amount of capital, and through the points outlined above, you may be able to reach your investment goals this year.

Buyers

Self-storage buyers are also presented with a number of compelling scenarios. In the last few years, new investors wanted to dip their toes in the self-storage industry. Now most of them want to dive in head first. With most of these investors experiencing an above-average return without all of the volatility of the stock market, small and large investors are taking advantage of our industry's stable nature. Below are compelling reasons why a self-storage investment makes sense in this year.

The self-storage REITs outperformed all other property types in 20101. This will continue for the foreseeable future.

  • With interest rates for 10 year loans ranging between 4 percent to 6.5 percent, depending on the loan to value, and overall cap rates ranging from 6.5 percent to 9.5 percent, we are seeing spreads between interest rates and cap rates of 250 to 300 basis points. This “arbitrage” that an investor can enjoy has motivated buyers to take action.
  • With the ever-present cloud of inflation hanging over the U.S. economy, we have seen investors find comfort in real estate assets and the flexibility the self storage owners have to raise rents. Keep in mind that this strategy has not always worked out during past inflationary times. Only time will tell how it works out this time around.
  • With the cost of debt for most deals hovering between 5.5 percent and 6.5 percent, and cap rates hovering between 8 percent and 9 percent for class-B and -C properties, it's worthwhile to do a little math. The accompanying chart outlines a very basic cash-on-cash analysis to consider. Note the class-B/C property enjoys a 58 percent greater return than the class-A property.
  • With the continued expansion of the U.S. apartment industry and the volatility of the U.S. housing bubble, self-storage is positioned to capitalize on the increased movement of the American population.

Self-Storage Cash-on-Cash Analysis Class-A vs. Class-B/C Facility***

Self-storage investors/buyers should take a closer look at their investment criteria. By thinking outside the box and considering investments that are passed over by some of the larger buyers, a savvy investor will be able to achieve a meaningful increase in his return. This will have a compounding effect as the industry continues to strengthen, and will lead to a very profitable investment.

Clearly, there is value in understanding what affects cap rates and property values in today’s market. Buyers should remember that sellers are not benefiting from low-interest-rate loans, which are creating increased cash flow and helping to make buyers' numbers work. Sellers should note: If it's a good time to buy, it's a good time to find a buyer. Barring any natural or financial disaster, the market will reach equilibrium this year, with buyers and sellers coming together on a number of deals.

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 and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE; e-mail bvestal@argus-realestate.com.