What are the trends with cap rates and property values?
Barry: A year ago, transactions were still closing at cap rates between 7.5 percent and 8 percent for class-A facilities. These same properties are now trading closer to 8.5 percent, with many properties offered at much higher rates. Long-term cap rates for self-storage are around 10 percent, so on a relative basis, owners still have good value in their properties.
It’s certainly not the top of the market anymore, but it’s a lot closer to it than the bottom. We expect values to continue to decline for a couple years. Everyone wants to buy at a 10 percent cap, so we’ll see increased activity in the 9 percent range for those who would like to put money to work, find a property in their geographic footprint, and understand that no one can pick a market bottom.
Chiswell: Cap rates continue to increase, therefore reducing purchase price because the calculation has an inverse relationship.
Kliebenstein: In the short run, 18 to 24 months, cap rates will weaken until financing is available. Look for cap rates to be 10-plus percent, and that will equate to a fall in prices per square foot. As appraised and real values decrease, so must seller expectations to move inventory and begin to restore strength to the market with price/value increases.
Operators are going to have to continue to be more resourceful to create increased NOI to substantiate their asking prices. The market will recognize tougher underwriting requirements, which may include salary adjustments, allowance for property-tax adjustments, insurance limits/coverage to value alignment, professional management fees, and replacement reserves.
Vestal: With cap rates trending upward through most of 2009, self-storage property values were dramatically down, in some cases as much as 30 percent to 40 percent. It’s hard to tell how far values fell, as there were almost no sales in the first six months of 2009; but it’s my best guess that cap rates reached 10 percent to 12 percent in the first part of 2009.
The cap rates over the last three to six months have started to narrow, and we’re starting to see transactions in the well-occupied, well-maintained and demographically superior locations in the 8 percent to 10 percent range. This is a more in line with historical averages and is most likely where cap rates will be for the foreseeable future.
Wilson: The easing of pressure to sell due to changes in banking policies has resulted in fewer facilities that are available for purchase. This should help stem the decline in property values, or at least slow it down. It’s expected that all real estate values in all property sectors will continue to decline for another 12 to18 months, particularly in markets where housing is the weakest.
The most significant consequence of the current investment market conditions is the realization on the part of owners and investors that not all facilities carry the same risk, and thus, one cap rate does not fit all. Asking someone what the cap rate is for self-storage today is like asking them what a house costs. There are too many variables to allow a single answer to the question.
The second installment of the State-of-the-Industry Report will focus on self-storage financing and construction.
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