Self-Storage Real Estate in the Western States: Capitalization Rates, Financing and New Development
|Copyright 2014 by Virgo Publishing.|
|Posted on: 11/23/2011|
By Ben Vestal
Over the past year, the self-storage real estate market has shown more activity as investors began to once again seek quality properties. To get answers to questions relevant to today’s facility owners, buyers and sellers, I recently assembled a roundtable of real estate experts to discuss the state of self-storage in the western region. I’ve asked them to comment on capitalization (cap) rates and the availability of financing in their markets. Joining us in the discussion are:
What is the current cap rate in your market, and what are your predictions for cap rates in 2012?
Berry: In Utah and Nevada, cap rates have not shown any particular trend either up or down. New properties are entering the market with cap rates as low as 7.25 percent and as high as 10 percent. I expect this range to hold steady throughout 2012.
Boldish: I’m predicting that cap rates will remain steady through the end of 2012 in the Oregon market. In 2011, verified sales produced a range of cap rates from 8.4 percent to 10 percent, and properties currently for sale have cap rates in the range of 8 percent to 12 percent.
de Jong: Cap rates in the primary Bay Area market have compressed noticeably over the past year. We’ve seen cap rates dip below 7 percent for institutional-quality facilities in good locations. Outlying cities such as Gilroy, Morgan Hill and Vallejo have seen trades in the 7.3 percent to 7.6 percent range, while Sacramento, the Central Valley and rural locations have suffered from a lack of sales transactions.
Cap rates will remain depressed in the primary markets due to the lack of available inventory and the amount of capital looking for acquisitions. The other driver will be the continued aggressive nature of the large real estate investment trusts looking to consolidate the market while the interest rates remain historically low. Cap rates will likely compress in the outlying markets as a result.
Gorden: In the Arizona market, cap rates for institutional-size properties have generally trended downward. Non-institutional-sized and rural properties have not traded with enough frequency to determine a trend. Predictions for 2012 will follow interest rates and the economy. Low interest rates result in low cap rates, and a better economy and more confidence to invest will also result in lower cap rates, and vice versa. I expect cap rates to compress outside of the Phoenix market as smaller investors begin looking to secondary markets for opportunities and as financing becomes more readily available.
Lucas: The last six to 10 months have presented a very interesting playing field for us in Colorado. Early in 2011, many of the nationals let it be known that they were looking and had money to spend. All the major buyers were looking for the same thing: class-A properties with strong operating histories and great demographics, and several opportunities in the same market were ideal. Just like in 2007, cap rates started dropping. We saw deals being done from 7.75 percent to 8.25 percent.
Today, the frenzy has settled back down to equilibrium in the marketplace. There are still many buyers in the market, but they’ll only consider acquiring one property in a region if they’re already operating there. They will look at class-B sites with upside, continue to look at 12 months of trailing history, and will make adjustments for increases in property taxes. This change has accounted for a more appropriate cap rate range of 8 percent to 9 percent for decent sites.
Is financing available in your market? If so, what loan terms are you seeing?
Berry: I would describe today’s loan market as a “designer” market. Those with AAA credit can get what they want as long as the loan to value (LTV) doesn’t exceed 75 percent. The approval process can be arduous, and without a AAA credit rating, loans will be very tough to get, period.
Boldish: In Oregon, cash transactions and owner financing are dominating most of the self-storage sales. Bank financing is available, but with most lenders not exceeding 70 percent LTV and a 10-year call. Rates vary from 5 percent to 7 percent.
de Jong: Financing has resulted in a further bifurcation of the market with a competitive advantage to the largest, best-capitalized operators. Interest rates and underwriting standards have favored these larger operators for the past several years, and this has not shown any significant signs of lifting. The larger the acquisition, the more capital required and the better the rates. Although the Small Business Administration (SBA) has been aggressively marketing to the self-storage community, we have not seen any deals completed in the Northern California market to date.
Gorden: Yes, financing is available for 60 percent LTV or less. Terms are generally 60 days to close with rates at 5 percent for life company loans on cherry-picked properties, or 5.75 percent to 6 percent on everything else. I’ve recently seen a 4.75 percent refinance. As yet, I have not seen an SBA deal close in the Phoenix area.
Lucas: Refinancing has been a challenge for some owners whose commercial mortgage-backed security loans have come due and their properties are no longer worth what they were a few years ago. This weakness, combined with tighter lending regulations, necessitated owners bring money to the closing table, take on a capable partner or even sell.
Today, typical loan terms are a 6.25 percent rate on a 30-year amortization with a 10-year call. Lenders are looking for debt yield—that’s the net operating income (NOI) divided by the loan amount—they want to see at least 10.5 percent on self-storage. If the numbers work, and the borrowers are really qualified, you can get the deal done. Timing is anywhere from 60 to 90 days.
As the investment market continues to stabilize, are you seeing any signs of new development in your area?
Berry: In Utah and Nevada, we are not seeing any current development of self-storage properties, but developers are beginning to shop for land. This could mean an increase in development activity in the coming years if developers are able to finance their projects.
Boldish: There are still non-performing properties available throughout Oregon. Our unemployment rate is higher than the national average and new development is slow. There are a few major developments in progress by nationally known companies, but I’m not seeing any speculative projects being built.
de Jong: There are several construction projects that will have been completed in the last 12 months in the San Jose area, including a development by Bay Area Self Storage and another by Extra Space Storage. These projects had been planned prior to the recession and were in markets where the occupancies and rates justified the additional capacity. I’m aware of several other projects in various stages of planning, and at least 17 additional sites where facilities that had been planned but are currently shelved for numerous reasons, including lack of available financing and excess supply.
Gorden: Currently, I’m aware of one development project that’s underway in a metro area, but in general the market demand has been met in Arizona. Several large lenders were still interested in funding the construction loan at 50 percent LTV. I’m not aware of any other experienced developers who are pursuing new development at this time.
Lucas: I’m currently aware of six different projects in Colorado that are in various stages of development. I’m just amazed. I thought it would be at least another year before this market took off again. Obviously the people who are developing have expertise and deep pockets to get the deals done.
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 firstname.lastname@example.org.