The self-storage market is experiencing a recent surge in transaction activity involving portfolios large and small. Several features of the current environment are responsible for these real estate investments. Primary among these are the historically low interest rates available today, which creates a positive spread between current cash yields from self-storage properties and the cost of financing. The positive-yield spread contributes to the current level of transactions, despite the overall slowing in market demand.
The combination of low interest rates and weak performance in the stock and bond markets has resulted in the unusual situation of increased real estate trading activity regardless of weakening property market conditions. As the economy has weakened and scandals spread throughout the corporate sector, new and experienced investors are increasingly turning to the stable returns of income-producing self-storage.
The highly fragmented storage industry lends itself to continuing consolidation as mid- and large-size operators aggressively seek greater market share to continue company growth rates. While the nationwide market consists of approximately 1.3 billion square feet in about 34,000 facilities, the top 10 operators combined have only about a 17 percent market share. The largest operator, Public Storage, with a market capitalization of 4.3 billion, controls only about 6.3 percent of the market. The desire to increase market size while attaining economies of scale and stronger brand names continues to fuel portfolio acquisitions.
Capital Flow and Growth
Capital is readily available for self-storage investments that offer attractive yields, even if it means buying assets at prices substantially above replacement costs. Chicago-based Security Capital Group purchased Storage USA, the second largest self-storage operator in the United States and a publicly traded REIT, for approximately $905 million in April 2002. Security Capital, an international real estate operating company previously acquired London-based Access Storage Solutions and Millers Storage in Australia. Shortly after announcing the acquisition, GE Capital Corp., a unit of General Electric Co., announced the $8 billion purchase of Security Capital, thereby becoming the new operator of about 557 Storage USA facilities.
While the REITS have been less active in portfolio acquisitions over the last three years, they are more than compensated by new self-storage participants. Several joint ventures have recently formed between experienced self-storage operators and private institutional investors to develop and acquire facilities. The strategy involves providing capital to established, well-run operating companies to fund current activities and growth. Some of the new investors include JP Morgan Capital Partners, Goldman Sachs, Walton Street Capital, Prudential, Heitman, Fidelity Management, New York State Commonwealth Retirement Fund and AEW. Examples of portfolio transactions include the recent Goldman Sachs/Devon Self Storage sale of $70 million for nine geographically diverse facilities to Amsdell Cos. Chicago-based U-Stor-It sold a portfolio of seven facilities in Chicago for $31.5 million to three different purchasers.
The acquisition market for high-quality self-storage product in top-tier markets has become very competitive. The sporadic capital provided for single-asset transactions coupled with the time required for entitling new developments is further promoting aggressive bidding for multiple-property opportunities. Competition is causing cap rates to fall for deals that meet investors' criteria even as occupancies have fallen. Capitalization rates are now ranging from about 6.5 to 8.5 for the best product in high barrier-to-entry locations.
Evaluating Portfolio Offers
Evaluating competing offers for any size portfolio has become more complex than ever before. Potential purchasers are now asked to provide in-depth information regarding ability to consummate a transaction. The purchaser must be prepared to disclose his source of funds, any approval process to close the transaction, and whether funds are provided through equity or debt sources.
The goal of a seller may be to sell a portfolio of properties to a single qualified high bidder. While preference may be given to buyers interested in purchasing an entire portfolio, sellers often entertain proposals on individual properties for several reasons. By breaking up a geographically diverse portfolio, a higher aggregate price may be achieved. Additionally, dividing the properties among multiple purchasers limits the risk of retrading agreed-upon price and terms associated with a single purchase.
Extremely low interest rates and ample capital have helped sustain the self-storage market despite lower occupancies and additional competition. Cap rates have fallen for better located portfolios that satisfy investors' desire for yield and safety. Overall, the long-term demand will grow as economic activity picks up, and self-storage will continue to be a source of stable yields with growth potential.
Marc A. Boorstein is a principal with MJ Partners Real Estate Services and an expert in the successful disposition and acquisition of self-storage facilities nationwide. He is a featured speaker and author regarding market trends in the self-storage industry. MJ Partners specializes in the disposition/acquisition and financing of portfolios and single-asset transactions. For more information, call 312.726.5800; e-mail firstname.lastname@example.org; visit www.mjpartners.com.