The self-storage real estate market is seeing resurgence in some areas of the country. To get answers to questions relevant to today’s facility owners, buyers and sellers, I recently assembled a roundtable of real estate experts to discuss the state of self-storage in the Northeast United States. I’ve asked them to comment on the state of the market in their regions and share their predictions on how the industry will perform in 2011. Joining us in the discussion are:
- Guy Blake, Pyramid Brokerage Co., Kingston, N.Y.
- Linda Cinelli, LC Realty, North Branch, N.J.
- Joe Mendola, NAI Norwood Group, Bedford, N.H.
As we’ve seen a dramatic swing in the volume of real estate transactions, from very few transactions in 2009 to a more normal transaction volume in 2010, what are the trends with cap rates and property values in your markets?
Blake: In Upstate New York, the short answer is cap rates are up and values are down, although certain segments of the industry have fared better than others. We’ve been seeing a “flight to quality” across the investment real estate spectrum. Investors are seeking safety more than anything else, and have little appetite for risk.
Accordingly, well-located, class-A facilities with good occupancy rates are still in high demand and are selling in the 8 to 9 cap range. Class-B and -C facilities or facilities with vacancy issues have not fared so well. Demand for lower-quality assets is still off compared to a few years ago, and the sellers of these facilities should expect cap rates of 10 percent or higher based on actual, in-place income. Buyers are simply not paying for vacant space or expansion potential.
Cinelli: In our experience in New York City and New Jersey, there are no “normal” transactions in today’s market. Property values have not increased. If anything, we hope to keep them stable. Cap rates have dropped 1.5 points, with aggressive rates at 7 percent to 7.5 percent, and most offers are around 8 percent to 8.5 percent.
Mendola: In the last 18 months, from east of Interstate 495 from Bourne, Mass., north to Concord, N.H., and over to the coast of Maine, there have been only two self-storage facilities that have closed—one in Bridgton, Maine, and one in Derry, N.H. For a well-located facility with strong demographics, the cap rates are between 8 percent and 9 percent. In more rural markets with less density, the cap rates are between 9 percent and 10 percent. These properties have good occupancies in the 80 percent to 85 percent occupancy range.
Due to the lack of construction financing will conversions become more prominent in the next couple of years?
Blake: I don’t think so. First, conversions generally require construction financing just like building new facilities from the ground up. Second, we have seen virtually no construction in the last two years, and I expect that to continue for at least the next two or three. As the recession wears on, I’m seeing more facilities whose occupancies are slipping into dangerous territory. I don’t expect to see any new construction, conversion or otherwise, until the existing facilities fill up their vacant space.
Cinelli: In my market, conversions are more prominent as there’s virtually no money for ground-up deals, especially with the indicators for three to four years to stabilize. We are seeing conversion interest in certain urban markets with the population density and demand to support new facilities.