Investment Opportunities in Self-Storage: 5 Keys for Owners/Sellers and Investors/Buyers

By Ben Vestal Comments
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An optimistic outlook for the self-storage transaction market means great opportunities for industry buyers and sellers. The year ahead should see great equilibrium, with buyers and sellers coming together on lucrative deals.

As 2012 picks up momentum, the self-storage transaction market is showing signs of equilibrium, which hasn't happened in the last few years. It appears buyers have regained confidence. They're being more disciplined with their assumptions, and they're willing to move forward with acquisitions that push the envelope of historical underwriting parameters.

This is largely due to the increased sophistication of many self-storage operations and the overall perception of lower risk in today's market. As demonstrated in the accompanying chart, the self-storage real estate investment trusts (REITs) outperformed all other REIT property types last year. The chart is just a snapshot of how the overall industry performed in 2011, but it has added fuel to buyers’ confidence, which will continue through 2012.

Self-Storage REIT Returns 2012***

Self-storage owners are seemingly confident as well, with many of them happy to simply operate their property, with little or no motivation to sell. Most have survived the recession, and with minimal new product being built over the last few years, they're enjoying increased occupancy and firmed rental rates. Owners will continue to enjoy occupancy and rate growth this year due to sound fundamentals and the lack of new competition.

The outlook for self-storage is one of optimism. Below are a key points and opportunities for self-storage sellers and buyers in today’s market.

Sellers

Single-asset sales are at the highest level since 2007, according to data provided by CoStar Group, a commercial real estate information company. In addition, pricing is at the highest level since 2008, with an average price per foot of $72.96 in 2011, according to PricewaterhouseCoopers LLP.

Increased interest in self-storage investment is expected to continue. This will keep the capitalization rates down and prices near historically high levels as new investors continue to enter the industry.

U.S. capital-gains taxes are close to an all-time low. No one knows what will happen to the U.S. tax structure, but with an election year upon us, taking profit when capital-gains taxes are so low isn't a bad thing. It's worth calling your accountant to see what your after-tax proceeds would be under the current tax structure. You might also want to see what your after-tax proceeds would be if the capital-gains tax were to increase 5 percent or 10 percent.

While most self-storage investors are focused on class-A facilities, the intense competition for these assets will drive the prices higher for class-B and -C assets in the year ahead.

Over the last few years, the focus has been on risk aversion. The key component that seems to inspire buyers and their lenders is “core” or “core-plus” assets and low leverage. With a new fiscal year upon us, buyers and lenders have received their annual allocations and should be more receptive to transactions in the “grey area” compared to what we’ve seen over the last few years.

This leads me to believe this is the year to "make it happen." Asset prices will be pushed higher by an increased demand from self-storage buyers. All of this reminds me of the old real estate saying, “It’s better to buy a year too early than a day too late.”

Self-storage owners should take a hard look at their investment goals. You'll make more money if you sell when the time is right than just renting more units and improving operational efficiency. The REITs and other large institutional buyers have access to a tremendous amount of capital, and through the points outlined above, you may be able to reach your investment goals this year.

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