Despite sales activity rising by 32 percent from a year ago, multiple transactions involved properties in tertiary markets. As a result, cap rates climbed 30 basis points in 2012 to the low 8 percent range. The median sales price was relatively unchanged compared to the previous year at $46 per square foot. Newer, high-quality properties in prime markets fetched above $180 per square foot in some cases.
Western Region. Elevated net in-migration supported by healthy job growth across the West boosted demand for self-storage space as homeowners relocating to new markets downsized into apartments, using storage for excess items.
Occupancy finished 2012 at 83.2 percent, marking a 210-basis-point improvement from 2011. Asking rents, however, fell 3.4 percent to $1.04 per square foot.
As sales velocity in the western region accelerated by 66 percent, initial yields compressed 30 basis points to the high 7 percent range. The median price was unaffected by the robust demand, staying flat from 2011 at $56 per square foot. Older assets in tertiary markets sold below $30 per square foot, while class-A products traded above $120 per square foot.
As REITs and private-equity groups remain bullish on high-quality self-storage investment product, cap rates will stay compressed into 2013, pushing some yield-seeking investors down the quality scale to capture higher returns. To satisfy investment objectives and grow portfolios, this pool of buyers needs to place liquidity into top-quality properties in primary markets.
Bidding will remain competitive for any new class-A listing, which will prompt most investors to pay cash to stave off the competition. With cap rates for these properties already treading near the sub 7 percent range, buyers looking to maximize returns may target stabilized assets in one-off markets, which can generate up to a 150-basis-point premium.
Meanwhile, smaller, local and regional investors priced out of the top-tier sector will purchase class-B and -C assets with proven cash flows in secondary and tertiary markets. Qualified buyers with a solid operating history may be able to use the Small Business Administration 504 loan program for the acquisition. Due to the attractive debt being offered, investors who use leverage could realize a cap rate spread of up to 400 basis points.
Positive trends will persist through year’s end, with an additional 400,000 jobs being created in the final quarter. Technology-driven markets, including Boston, Los Angeles, New York City, San Francisco and Seattle, along with oil-rich regions in North Dakota and Texas, will realize a significant portion of these gains. As residents continue to relocate to these areas, many will enter the rental community and use storage units for excess items. This rise in demand, coupled with limited construction, will support positive absorption across the nation.
Michael Hoffman is the first vice president and national director of the Marcus & Millichap Real Estate Investment Services National Self-Storage Group. The company specializes in commercial real estate investments and has more than 1,200 professionals in offices nationwide. To reach Hoffman, call 303.328.200; e-mail email@example.com .