The self-storage real estate market continues to improve in many areas of the country, including the northeast states. However, the number of quality, stabilized facilities available for purchase is beginning to dwindle, forcing capitalization (cap) rates to compress in some markets. The following real estate experts discuss cap rates in first- and second-tier markets, loan availability, and which regions are prime for investors.
- Guy Blake, Pyramid Brokerage Co., Newburgh, N.Y.
- Linda Cinelli, LC Realty, North Branch, N.J.
- Joe Mendola, NAI Norwood Group, Bedford, N.H.
- Chuck Shields, Beacon Commercial Real Estate, Radnor, Pa.
Are you seeing the cap-rate spread between first- and second-tier markets compressing?
Blake: In upstate New York, the short answer is yes, although there are a host of other factors at play. Demand for quality, stabilized facilities remains strong, so cap rates on those facilities have been compressing as more and more buyers chase fewer and fewer deals. The markets are still very risk-averse, however, so opportunities such as distressed facilities or those with high vacancy rates are still very difficult to move at any price.
Cinelli: The New York/New Jersey market has shown a strong interest from buyers. With good product at a premium, cap rates have hit as low as upper sixes to low sevens. In high-density areas, the occupancies have increased, resulting in higher net operating income (NOI). Our second-tier markets, while not demanding the lower cap rates, are showing a strong buyer interest with cap rates between 7.5 percent and 8.5 percent.
Mendola: In the northern New England market, owners have realized how powerful an investment like self-storage is in an economy that prohibits investors from earning a satisfactory yield on their investment without taking on high risks. Consequently, there have been very few facilities sold in 2012. There have been none sold in the first-tier markets, so there has been compression on the second-tier-market cap rates. This is partly because of the limited product available and partly because of the low cost of borrowed funds. Cap rates are down to a range of between 8.25 percent and 8.75 percent.
Shields: The strengthening competition among investors for product (stabilized, quality assets) results in higher values, thus the decrease in cap rates. It seems that the higher-tier markets in Pennsylvania are seeing 8 percent to sub-8 percent cap rates, while the second-tier product will realize a 9 percent to 10 percent cap rate. For example, recently in a second-tier market, there was a two-facility transaction with 95-plus percent occupancy and low expenses that sold at a 10 percent cap rate.
What market areas in your territory present a good outlook for self-storage?
Blake: Self-storage is a now a mature industry, and New York and Connecticut are mature markets. We’re not expecting any dramatic population growth, and many markets are already over supplied with self-storage. I do not see any significant new construction occurring for several more years.
Cinelli: The New York and New Jersey markets have a strong consistent demand, and the rental rates are higher here than in most of the other states. With the last few years of basically no new ground-up facilities, the demand had met the supply for the most part. We now see new construction opportunities and conversions. The suburban markets have shown stronger occupancies, and the housing market is starting to show activity for new developments. This is a slow recovery, and it will be some time before the pipeline gets the activity we did in the past, which made the demand for self-storage in the second-tier market.