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Understanding Self-Storage Real Estate Value During a Credit Crisis

Minh Tran Comments
Continued from page 1

The same theory can be applied to the CRE industry and the decline in self-storage values. The period from 2005 through the first six months of 2007 could arguably be termed as the CRE (including self-storage) relative to transaction activity and pricing. Using storage commercial mortgage-backed security activity as a benchmark, more than $6 billion was placed in self-storage during this period compared to just $2.5 billion from 2000-2004.

Transaction activity from 2005 to mid-2007 was at an all-time high with the capital markets being the main driver. The availability of capital combined with historically low interest rates and creative debt options allowed investors to purchase properties at a feverish pace, which benefited sellers and created an artificially inflated market.

During this peak period, investors could secure financing that required little equity—in some cases as little as 10 to 20 percent—which enabled them to capitalize on an aggressive lending market. For the first time, the low amount of required equity allowed private investors to participate in an arena with the larger institutional players on a fairly level playing field.

Today's CRE Values

During the peak, class-A properties would trade in the plus/minus 5 to 6 percent cap rate range with the stabilized return in the 7to 7.25 percent range. Concurrently, high leverage and sub-6 percent financing was available to provide enough room to increase returns, albeit not significantly. In today’s market, class-A stabilized product continues to trade within that same 7 to 7.25 percent cap-rate range, but the key term within that statement is “stabilized,” whereas two years ago a premium would have been achieved with the “potential upside” story of the property.

Although media reports continue to depict a declining CRE market, the self-storage industry has continued to post respectable numbers relative to revenues and occupancy. Storage REITs are once again among the top investment performers in 2008 and have shown that our industry is able to withstand a national economic downturn relative to other real estate asset classes.

While increasing storage occupancy and revenue trends may not continue in 2009, they have helped alleviate some of the property-value declines that worry investors. As reports continue to appear showing that CRE values are in decline, just remember that everything is relative.

Minh Tran is a managing director in the Houston office at HFF (Holliday Fenoglio Fowler) LP. He can be reached at 713.852.3524; e-mail

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