This month, I gathered real estate experts to discuss the state of self-storage in the Northeast. Let’s hear what they have to say about their respective cities and regions. Our panel includes: Mike Bellinger, Pyramid Brokerage, Syracuse, N.Y.; Linda Cinelli, LC Realty, North Branch, N.J.; John Lisowski, Grubb & Ellis, Pittsburgh; Joseph Mendola, The Norwood Group, Bedford, N.H.; and Chuck Shields, Beacon Commercial Real Estate, Conshohocken, Pa.
This month, I asked our brokers straightforward questions owners and potential buyers will find pertinent, including which items most concern their self-storage clients. They were asked to rank the following issues on a scale of one to seven, with seven indicating the greatest amount of apprehension. As you can see, interest-rate increases are on the minds of many owners. However, all of these issues are important and should be considered when making a decision to sell.
|Competition from PUD||5-6||5.6|
|Declining or Stagnant Rates||2-7||4.8|
|Domination by “Big Guys”||1-7||3.0|
What are the cap rates for "reasonably" projected incomes? What impact do you think the recent rise in interest rates has on cap rates?
Bellinger:We’re seeing an average cap rate of 10 percent.
Cinelli:In my market, there's such a demand for inventory that we're seeing facilities at 7.5 percent to 8.5 percent cap rates. The interest rates are not affecting buyers at this time since rates are still good. Their main concern is the terms of their loans—they need to have 20-year terms if they're buying at lower cap rates.
Lisowski:Typically, cap rates for self-storage investment in Western Pennsylvania have been in the 10 percent range. From the view of the investor, as interest rates rise, cap rates will have to increase to the 11 percent to 12 percent range to create the desired return. Consequently, owners see a devaluation of their properties, which makes them very reluctant to sell.
Mendola:Cap rates in my area range from 9 percent to 9.5 percent on real, trailing 12-month income and expenses. Rising interest rates will raise cap rates.
Shields:I have found 9.5 percent to 10 percent cap rates are considered reasonable. I believe (and history has shown) that as interest rates increase, so will cap rates. At the same time, returns will decline. If buyers are not able to get the returns they want, they aren’t going to pay the “all-time high" prices we have seen to date. The obvious results are declining values.
Cap rates continue to be all over the map; mostly, they differ because of definitions and location. Dense urban areas with strict zoning get much lower caps, and caps based on trailing incomes tend to be lower than stabilized ones. One thing is for certain—cap rates are the lowest they have ever been.
Are interest and cap rates having any impact on buyers?
Bellinger:Obviously, buyers want higher cap rates as interest rates increase.
Cinelli:Caps rates are affecting buyers, but inventory is low. Buyers are still actively seeking facilities, as interest rates have not yet reached a point to slow down the market.
Lisowski:Not yet, but I see it happening very soon. Buyers will be looking at properties with an 11 percent or 12 percent cap rate in mind, which will not sit well with sellers.
Mendola:Yes, because sellers want to sell based on yesterday’s cap rates, and buyers want to buy on tomorrow’s cap rates.
Shields:Buyers have not really reacted to the slight increases in rates so far. Rates are still good, and there's not a lot of product on the market. Buyers and investors are willing to look at anything and everything, regardless of price.
As long as the interest rates remain low (how long can it last?), deals at low cap rates make great sense.
Has there been a major shift in occupancy and rental rates in your area? Are you seeing markets experience moderate (15 percent) or significant (25 percent or higher) vacancy?
Bellinger:I haven’t seen much of a shift in occupancy or rental rates in my area. There isn’t a lot of close competition, and most facilities are full. Owners here worry more about the “big guys” coming into the market and offering deals smaller facilities can’t match.
Cinelli:Vacancy rates vary in different markets, but facilities still maintain a high average 75 percent to 85 percent occupancy. New facilities in an area affect the overall rate until the market catches up.
Lisowski:There hasn't been a major shift in occupancy or rental rates in Western Pennsylvania. Vacancy tends to be in the 10 percent to 15 percent range for most facilities.
Mendola:For the most part, occupancy rates are down from the low 90s to the low 80s. Rental rates are stagnant to 10 percent lower.
Shields:Surprisingly, there has been a number of facilities that have not seen a decline in occupancy at this time of the year. In some cases, it has increased. This might not be the case throughout, but it is interesting that it has happened at all. This could give fuel to more development—hopefully not overdevelopment.
Overbuilding remains the single biggest threat to self-storage in almost every location.
Are investors still interested in self-storage? If so, what kind of investors are they, industry newcomers or seasoned veterans?
Bellinger:They're mostly newcomers, people who have lost money with other investments want to get into self-storage. They see this as a business with low costs and minimal management—a good investment in comparison to other forms of real estate. Some see self-storage ownership as a great alternative to a stagnant career or looking for a job in a tough employment market.
Cinelli:Investors are still out in full force looking for sites and existing facilities. They feel this is the best overall investment next to retail and apartments.
Lisowski:Seasoned self-storage owners are always looking to increase their holdings when opportunities arise. Additionally, there continues to be a steady interest by newcomers.
Mendola:Investors still love self-storage as an investment vehicle. We’re seeing newcomers and veterans.
Shields:Investors see self-storage as a good venture. The owner who has one or more facilities knows what kind of investment it can be and is out in the market looking for more product. The new investors have realized the returns and cap rates are as good if not better than those for other products. It appears self-storage has earned some respect among investors as well as lenders. They see it as a good income-producing product with stable returns. We’ve always had self-storage people interested in buying more product. Now we have investors interested in it as well. This is a big change in our market.
Are you seeing a rise or decline in conversions? Briefly describe what is occurring in your area.
Bellinger:There has been a rise in conversions due to manufacturing plants leaving the area and leaving behind large warehouses. The cities and counties are turning these into economic-development zones including tax incentives, making it prime real estate for the self-storage investor.
Cinelli:Conversions are in great demand in my area. With the time it takes to go through entitlements, owners can be up and running their operation and into a market quicker. The price per square foot is higher in these areas. Some buildings have some functional problems but, overall, the vertical market does well in the Northeast.
Lisowski:There appears to be an increase in the conversion market as the amount of available land suitable for profitable facilities is scarce, due in part to zoning issues, increasing regulation, unfavorable demographics and lack of visibility for the available parcels of land.
Mendola:There has been a decline in conversions. Suburban markets are most desirable now, and conversions don’t work there.
Shields:The conversion market is unique to a certain type of self-storage owner. I can’t tell if there is an increase or decrease in these types of projects; but when product suitable for conversion becomes available, there always seems to be a handful of investors looking at the possibilities.
Clearly, the popularity and success of a conversion project depends on the market.
Michael L. McCune has been actively involved in commercial real estate throughout the United States for more than 20 years. Since 1984, he has been owner and president of Argus Real Estate Inc., a real estate consulting, brokerage and development company based in Denver. In 1994, he created the Argus Self Storage Real Estate Network, now the nation's largest network of independent commercial real estate brokers dedicated to buying and selling self-storage facilities. For more information, call 800.55. STORE or visit www.selfstorage.com.