The self-storage real estate market has experienced an uptick in sales over the past year, with investors once again looking for quality assets to add to their portfolios. In this article, real estate experts representing self-storage markets in the western states discuss trends in capitalization (cap) rates and sales, and areas ripe for new development. The contributors are:
- Jim Berry, CRG Utah, Salt Lake City
- Steve Boldish, Coldwell Banker Commercial NW, Medford, Ore.
- Alan Davidson, Realty One Group, Laguna Niguel, Calif.
- Tom de Jong, Colliers International, San Jose, Calif.
- Jeff Gorden, Eagle Commercial Realty Services, Phoenix
- Joan Lucas, Joan Lucas Real Estate Services, Denver
- Jason Wilcox, Gleason and Co. Commercial Real Estate, Kent, Wash.
What are the cap-rate and sales trends in the first- and second-tier markets in your state?
Berry: There has been little evidence of cap-rate compression between first- and second-tier markets in Nevada and Utah. Asking rates are, for the most part, still in the 6.5 percent range, with deals being finalized around 8 percent. However, that may be about to change. There’s one second-tier property now in the market with a listed rate of 8 percent, and it will likely sell above the asking rate.
Boldish: Oregon’s first-tier market areas of Portland and Salem have not seen a drop in cap rates from those statewide and continue to sell in the 8.5 percent to 9 percent-plus range. Buyers are seeking the Portland market, but good properties are difficult to find as owners are not inclined to sell. [Online real estate listing service] Loopnet has reported six sales statewide year-to-date, with all coming in second- and third-tier markets. The largest property is just under 25,000 square feet.
Davidson: As available properties are in scarce supply in the major metropolitan areas of Southern California, buyers are casting a wider net into the less populated areas such as the Santa Clarita Valley, the high desert (Victorville/Bakersfield) and the low desert (Palm Springs/Palm Desert). Some examples of recent sales include a 9.58 percent cap in the L.A.-metro area; a property in an outlying county traded at a 9.95 percent cap; and a facility in the high desert sold at a 7.5 percent cap. Cap rates in the major markets have little room to compress, and buyers are willing to pay a premium for properties in outlying areas, rather than overpaying for similar product in the coastal areas.
de Jong: Northern California has seen a compression of cap rates between facilities based on location and quality. Facilities in second-tier markets are generally seeing a lot of interest, although more from local or regional investors, not as much from the institutional or public entities.
Gorden: In 2012 we saw a reappearance of true market-rate sales of self-storage facilities in Arizona’s second-tier markets. During the period from 2009 to 2012, there were less than a half a dozen trades in these areas, and all were at some point along in the foreclosure process. In Phoenix and Tucson, cap rates have fallen considerably, and there’s just enough interest now in secondary markets to gauge the return premium for comparison. There has been a shortage of available product in the first-tier markets, and communities with a solid employment base will fare well in the coming year as investors look to close deals.
Lucas: Colorado is a bit of an anomaly in that we don’t see properties turning as often as in other states. Packages of two to four properties that we consider B or B-plus are commanding stronger rates than in last several years. The reason is simple, the class-A sites just aren’t for sale at this time. So if buyers are looking in the Colorado market, they’re relegated to acquiring properties less than institutional grade but with big prices. Older, first-generation properties in outlying cities are suffering a bit because there’s less demand, thus lower prices.
Wilcox: Cap rates in Washington state averaged 8.4 percent in 2012. Tertiary markets ranged 9 percent to 11 percent, while facilities close to larger metros ran between 6.25 percent to 7.7 percent. I haven’t seen evidence of cap-rate compression in the tertiary markets. Many investors with whom I’ve spoken have expressed they’re being very careful in their site selections, which is reflected by the relative lack of recent sales activity.