Investors sense the rich opportunities that await and believe the worst is over, but are frustrated at the lack of quality investments. As such, they are becoming more aggressive in their pricing. At the same time, owners are becoming more concerned with the speed of the recovery and worried about the uncertainty surrounding their debt. They are, therefore, starting to accept the new reality of the marketplace.
There are still too few closed transactions to define capitalization rates by geographical area and facility type. The best indicator of the cap-rate range comes from the analysis of current listings supplied by the most active self-storage brokers. The accompanying table (“Implied Cap Rates Based on Asking Prices”) illustrates the implied rate based on asking prices and net operating income, sorted by facility size. The implied cap rate sets the lower limit of the range, considering the properties will most likely sell for a price less than asking.
There are very few high-quality, investment-grade (class-A) facilities available today, and the few that have sold did so with cap rates in the 7.5 percent to 7.75 percent range, or sometimes lower based on the trailing 12 months net operating income. Investor pricing takes into consideration the potential upside for revenue even on otherwise stabilized facilities once the economy totally recovers, which means the anticipated overall return will be higher.
A Look Ahead
The current state of the U.S. self-storage industry reflects the continued economic uncertainty of the overall economy. Self-storage is in slow but steady recovery, and it appears it will be one of the first―if not the first―real estate sectors to pull through.
All markets are in constant flux given all the uncertainty in the job market, and so the successful operators are the ones who are keeping a close eye on ways to gain the competitive advantage. For most, that means effectively employing the use of concessions to help drive revenue.
Self-storage is entering a new era that offers challenges and opportunities. The biggest opportunities are for external growth through acquisitions, as new construction will be minimal. The challenges for the smaller operators will be met by some with the use of third-party management companies and self-storage call centers.
Self-storage has proven its ability to outperform most other real estate sectors and has made a giant step toward becoming recognized as a core asset.
Charles Ray Wilson is the founder of Self Storage Data Services Inc., an independent research firm that maintains the nation’s largest database of self-storage operating statistics. He’s an internationally recognized leader in providing independent research on the self-storage industry. For more information, visit www.ssdata.net .