By Ben Vestal
The self-storage real estate market is beginning to stabilize, and investors are once again seeking quality properties. 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 southeast region. I’ve asked them to comment on cap rates in their markets and share thoughts on how the industry will perform moving forward. Joining us in the discussion are:
- Allen Barnhill, Omega Properties Inc., Atlanta
- Bill Barnhill, Stuart LaGroue and Shannon Barnhill Barnes, Omega Properties Inc., Mobile, Ala.
- N.J. “Joey” Godbold, Percival McGuire Real Estate, Charlotte, N.C.
- Frost Weaver, Weaver Realty Group, Jacksonville, Fla.
As we’ve seen a dramatic swing in the volume of real estate transactions, from very few in 2009 to a more normal volume in 2010, what are the trends with cap rates and property values this year?
Allen Barnhill: Overall, we’ll see cap rates hold steady. However, we have and will continue to see some separation or a gap in cap rates based on facility class, performance and location. In our major markets in Georgia, cap rates for class-A facilities have held up very well, and we’ve even seen a few cases where cap rates have moved a little lower than we expected. There’s a much wider cap-rate range for mature properties, all dependent on the local market conditions of demand, facility condition and performance.
Shannon Barnhill Barnes: The trend in cap rates for 2011 will remain essentially in the same range as 2010. Cap rates could start trending upward if interest rates begin climbing. As the economy continues to improve and the chance of having a double-dip recession lessens, the Fed will likely begin to gradually raise interest rates. There’s a greater demand for class-A properties in major metropolitan areas, which is driven by cash buyers such as real estate investment trusts (REITs) that are not as dependent on financing. Class-B and -C properties in secondary markets are more dependent on capital availability and changing interest rates.
Godbold: With interest rates still at a low relative range, we’ve seen a decrease in cap rates for quality properties, particularly those suitable for institutional investors. Even so, for buyers and sellers to get together on a price, sellers must recognize the constraints of underwriting. Whether we’re working with an institutional cash buyer or a transaction that must be financed, deals are being underwritten on the basis of actual income over the past 12 or more months.
Weaver: Cap rates for stabilized properties in good locations are still in the 9 percent range, while 8.5 percent seems obtainable for excellent properties, and properties below the norm are at 10 percent or higher. Overall, occupancy rates have stabilized in most markets in north and central Florida. With stabilized cap rates and occupancies, values are no longer declining in most areas. However, increases in value will probably be slow based on slow increases in occupancy.
As the economy and real estate market start to recover, should owners consider selling or buying, or continue to operate their properties and see what happens?
Allen Barnhill: Based on my personal experience as a self-storage owner, the decision to sell, buy or hold really depends on the business and personal goals of the owner. For owners considering selling, some positives include cap rates holding in an attractive range for performing properties, and we’re seeing increased activity from buyers looking for self-storage facilities. The potential buyers include not only larger firms but also local and regional operators and investors.
Godbold: As owners are considering the possibility of selling, there are two conflicting dynamics: attractive cap rates for sellers, and properties that have yet to rebound with regard to occupancy rates. When a seller decides to wait out the recovery cycle―which, of course, is a viable option―he must realize there’s the risk of absorption back to the “stabilized” level he enjoyed two years ago and the risk that cap rates will increase, thus erasing some or all of the rebound in value. In North Carolina, we’re beginning to see a recovery in occupancy rates, but not back to where they were pre-recession.