Large Investment Groups Change the Self-Storage Real Estate and Finance Landscape

By Ben Vestal Comments
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While I strongly believe the performance of self-storage as an investment will be quite positive in the long run, there’s reason to believe the game has changed thanks to large investment groups entering the business.

In reviewing the fourth-quarter 2011 same-store operating numbers for the four major real estate investment trusts (REITs), revenue for each was up between 3.4 percent and 5.8 percent from the fourth quarter of 2010. More important, all four showed substantial gains in net operating income (NOI), ranging from 4.1 percent to 9.3 percent. In the “new and improved” self-storage real estate market, 90 percent or more of value is still in the NOI. Cash is still king, and the ability to attract and capture tenants in cyberspace is now the industry norm.

Note: Same-store numbers are based on 253 Extra Space stores, 244 Sovran Stores, 331 CubeSmart stores and 1,931 Public Storage stores. (Source: Grubb & Ellis Fourth Quarter 2011 REIT Report)

Note: Same-store numbers are based on 253 Extra Space stores, 244 Sovran Stores, 331 CubeSmart stores and 1,931 Public Storage stores. (Source: Grubb & Ellis Fourth Quarter 2011 REIT Report)***

With the acquisitions market alive and well, it brings to light the continued bifurcation in the market between institutional-type investors and non-institutional ones. It’s important to note “institutional” doesn’t just refer the four major REITs; it’s any group in today’s market that has access to relatively inexpensive capital/equity. This has allowed these types of investors to buy properties at an aggressive pace over the last 12 months.

It has also created two different pricing structures, since the aggressive buyers are not willing to buy smaller properties (less than 50,000 square feet), and are just now starting to consider second-tier markets—albeit at a substantial discount to what they’re paying in major markets. According to the National Association of Real Estate Investment Trusts (NAREIT), self-storage REITs returned 35.2 percent last year, the second consecutive year the sector has led the pack. The recent published success of the storage industry, along with the return of confidence among real estate investors in general, has resulted in mainstream real estate investors racing to it. This new crop of investors, including pension funds, private-equity funds, university endowments, ultra-high net-worth individuals and non-self-storage public companies, has changed the game on several levels. Outlined below are some of the basic reasons.

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