By Michael Hoffman
Both good news and bad bolstered the self-storage industry in 2012. The manufacturing sector led the demand, boosting job growth. Technology and oil were not far behind, while Hurricane Sandy’s unfortunate aftereffects displayed a silver lining for investors. Meanwhile, capitalization (cap) rates are compressed thanks to positive readings by real estate investment trusts (REITs) and private equity groups, sending yield-seeking investors down the ladder to one-off markets and class-B and -C assets.
What does all of this mean for self-storage owners and investors in the year ahead? Read on for a summary of 2012 real estate and performance trends and predictions for upcoming months.
Coastal Cities and Jobs Lead Recovery
Demand for self-storage space will be sustained by an improving job market and the daunting effects from Hurricane Sandy. With the economy on the mend, the nation has gained 1.3 million jobs in 2012, which enhanced consumer confidence to a four-year high and boosted retail sales.
The catastrophic events unfolding from the hurricane resulted in an estimated $20 billion to $30 billion in damage along the Eastern Seaboard. Typically after a natural disaster of this magnitude, demand for self-storage accelerates as homeowners store undamaged goods during the cleanup process, while contractors and local suppliers use commercial space. As such, operators with heavy exposure to the East Coast will see a sharp increase in business over the next six to 18 months.
Occupancy, Rates and Sales by Region
Eastern Region. As employment grew in most of the eastern region, demand for self-storage space remained robust, while limited new construction supported positive net absorption. As a result, occupancy in the region surged 350 basis points in 2012 to 85 percent, which bolstered asking rents 5 percent to $1.02 per square foot.
Robust competition and low interest rates applied downward pressure on cap rates throughout the region, with first-year returns compressing 40 basis points to the low 8 percent range. As several older buildings with deferred maintenance sold in secondary and tertiary markets, the overall median price for the region slipped 8 percent year over year to $55 per square foot. A few class-A products in prime areas such as northern New Jersey and Washington, D.C., fetched more than $175 per square foot.
Midwest Region. In the Midwest, the manufacturing industry once again helped to sustain demand for commercial and residential self-storage units. For the year, occupancy was up 140 basis points to 86 percent, representing the highest level since 2008. In response to the intense demand, landlords enhanced asking rents 3.1 percent in 2012 to $0.77 per square foot.
With a couple of class-A assets trading at cap rates near 6 percent in 2012, yields across the Midwest tightened 60 basis points to the mid to high 7 percent territory from a year ago. The median sales price in the region surged 40 percent year over year to $42 per square foot, as REITs snapped up high-end properties trading above $100 per square foot in Chicago.
Southern Region. Fostered by firm demand in the Texas markets, occupancy in the southern region soared 250 basis points to a four-year high of 83.4 percent. As a result, operators increased asking rents 2.1 percent to $0.81 per square foot.