There is currently more product on the market, but asking cap rates are still in the 7 percent range in West Canada, and disconnect between vendors and purchasers continues. In 2009, expect cap rates to range from 8 percent to 8.5 percent, or 9 percent to 9.5 percent for non-urban properties.
Supply and Demand
For the first time in many years, several projects did not move forward in the Lower Mainland in 2008 because they were not economically feasible due to high land costs ($1.5 million or more per acre), high construction costs ($65 to $75 per square foot) and rent levels too low to justify the costs.
Self-storage financing has become difficult to obtain because of the perception of risk relating to tenant mobility. Significantly fewer lenders are willing to finance self-storage development. The most important factor influencing self-storage development is the tightening of financing with fewer lenders, higher equity requirements, higher fees and interest rates.
Lease-up of new facilities in oversupplied markets has been slow—less than 2 percent per month. Facilities in lease-up are increasingly aggressive in securing tenants, which affects rents in individual markets. However, lease-up in markets that are undersupplied continues to be strong. One new facility reports 35 net units leased per month; another reports 50 percent lease-up in five months.
The self-storage market is being affected by the same economic forces influencing other industrial-commercial investment properties resulting in projected level rents, softening occupancy, higher cap rates and reduced development. Summing up the Western Canada outlook for 2009, I anticipate the market will hold steady in rents and occupancy. There will be limited additions to supply, and cap rates will return to pre-2007 levels.
Candace Watson is the principal of Canadian Self Storage Valuation Services Inc., which provides appraisal and feasibility analyses to self-storage owners and developers. Watson has been appraising self-storage facilities since 1978 and has evaluated approximately 40 percent of the current supply in the Lower Mainland. She is a regular speaker at industry tradeshows and conferences. To reach her, call 604.681.2929; e-mail firstname.lastname@example.org.