Self-Storage Real Estate in the Western States: Capitalization Rates, Financing and New Development

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By Ben Vestal

Over the past year, the self-storage real estate market has shown more activity as investors began to once again seek 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 western region. I’ve asked them to comment on capitalization (cap) rates and the availability of financing in their markets. Joining us in the discussion are: 

  • Jim Berry, CRG Utah, Salt Lake City
  • Steve Boldish, Coldwell Banker Commercial N.W., Medford, Ore.
  • Tom de Jong, Colliers International, San Jose, Calif.
  • Jeff Gorden, Eagle Commercial Realty Services, Phoenix
  • Joan Lucas, Joan Lucas Real Estate Services, Denver

What is the current cap rate in your market, and what are your predictions for cap rates in 2012?

Berry: In Utah and Nevada, cap rates have not shown any particular trend either up or down. New properties are entering the market with cap rates as low as 7.25 percent and as high as 10 percent. I expect this range to hold steady throughout 2012.

Boldish: I’m predicting that cap rates will remain steady through the end of 2012 in the Oregon market. In 2011, verified sales produced a range of cap rates from 8.4 percent to 10 percent, and properties currently for sale have cap rates in the range of 8 percent to 12 percent.

de Jong: Cap rates in the primary Bay Area market have compressed noticeably over the past year. We’ve seen cap rates dip below 7 percent for institutional-quality facilities in good locations. Outlying cities such as Gilroy, Morgan Hill and Vallejo have seen trades in the 7.3 percent to 7.6 percent range, while Sacramento, the Central Valley and rural locations have suffered from a lack of sales transactions.

Cap rates will remain depressed in the primary markets due to the lack of available inventory and the amount of capital looking for acquisitions. The other driver will be the continued aggressive nature of the large real estate investment trusts looking to consolidate the market while the interest rates remain historically low. Cap rates will likely compress in the outlying markets as a result.

Gorden: In the Arizona market, cap rates for institutional-size properties have generally trended downward. Non-institutional-sized and rural properties have not traded with enough frequency to determine a trend. Predictions for 2012 will follow interest rates and the economy. Low interest rates result in low cap rates, and a better economy and more confidence to invest will also result in lower cap rates, and vice versa. I expect cap rates to compress outside of the Phoenix market as smaller investors begin looking to secondary markets for opportunities and as financing becomes more readily available.

Lucas: The last six to 10 months have presented a very interesting playing field for us in Colorado. Early in 2011, many of the nationals let it be known that they were looking and had money to spend. All the major buyers were looking for the same thing: class-A properties with strong operating histories and great demographics, and several opportunities in the same market were ideal. Just like in 2007, cap rates started dropping. We saw deals being done from 7.75 percent to 8.25 percent.

Today, the frenzy has settled back down to equilibrium in the marketplace. There are still many buyers in the market, but they’ll only consider acquiring one property in a region if they’re already operating there. They will look at class-B sites with upside, continue to look at 12 months of trailing history, and will make adjustments for increases in property taxes. This change has accounted for a more appropriate cap rate range of 8 percent to 9 percent for decent sites.

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