Self-Storage in the Western States: Real Estate Snapshot

Michael L. McCune Comments
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Laney: The buyers in the current marketplace have been the small investors looking for properties $2 million and under. Existing storage owners looking to buy properties in their current markets are also common. The real estate investment trusts don’t appear to be in the acquisitions game right now.

Layton: Small, local operators adding to their portfolio and new owners comprise most of the buyers in Washington. Our cap rates haven’t been driven skyward as in some areas, so many of the large regional buyers are looking elsewhere. Self-storage is one of the most stable investments in Washington since occupancies remain high and barriers to entry are higher, making the state a desirable market for the long-term investor.

Lucas: We have a couple of large development opportunities that, in a normal market, would be excellent investments for any one of the large national operators. That being said, after talking with all of the major players, none are in the market to purchase or develop. We have quite a bit of interest on a listing that has seller financing, but it appears most buyers are still waiting for the bottom of the market before they start to actively purchase facilities.

Ripley: Larger buyers in North California are looking for properties of more than 50,000 square feet, but the greater potential comes from smaller operators seeking to increase their portfolios with properties that have good upside. There’s no development activity in the market, which is reinforced by the lenders’ attitude toward financing new projects.

3. Describe the cap-rate situation in your market. What changes have you seen over the last year?

Handley: We’ve seen a slight increase in cap rates in Nevada and Utah. There are many variables one needs to consider when evaluating a cap rate, including facility size, class and assumable financing with terms not available in today’s market.

Laney: Arizona cap rates are climbing into the 8 percent to 8.5 percent range, though there is quite a disconnect between the sellers and buyers. The area is being canvassed by distressed-property buyers looking for buys in the 10 percent to 11 percent cap-rate range.

The New Mexico market cap rates are in mid-swing, going up to the 10 percent mark, with Albuquerque and Santa Fe markets in the 8.5 percent to 9 percent range and the rest of New Mexico reaching toward the 10 percent mark. Cap rates may eventually get into the 11 percent range depending on the property and particular market.

Layton: In Washington, the average cap rate is 8.75 percent, up from 7.75 percent last year. Owners are struggling with selling for a higher cap rate, since they’re holding solid investments and they don’t want to give away the property. Some of the foreclosed or bankrupt properties have gone for 10-plus percent cap rates, but those are few and far between.

Lucas: Lenders are not interested in what the project can do in the future. They’re only concerned about the past and current performance of the facility, with cap rates based on the trailing income and expenses. I sold a project at an 8.5 percent cap rate last spring. It was an excellent smaller facility with great occupancy. If I was selling it today, it would probably show a 9 percent cap.

Ripley: Nine percent to 9.5 percent is the typical cap rate on offerings in North California. The key question is whether the numbers the seller presents will hold up to scrutiny once the buyers perform their due diligence. 

4. Why should potential investors and current owners buy self-storage today?

Arnold: Potential investors and existing owners of self-storage should increase their holdings now. It’s unlikely the market will get worse than it is, and if they purchase based on today’s net operating incomes, they should look very good when the pendulum swings upward.

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