It’s worth noting that the average spread over the last 10 years is around 425 basis points, so today’s spread of 480 basis points is in the top half over the last decade. Obviously the spread doesn’t take into account the bank’s risk-adjusted spread, as that’s administered by the bank on a deal-specific basis, but it should give you an idea of why cap rates are at historically low levels. More important, it indicates the opportunity in today self-storage investment market due to the low cost of debt.
Taking an Accurate Approach
Buyers today are able to reach cash-on-cash returns that are compelling by today’s standards, all while paying very aggressive prices due to the arbitrage between cap and interest rates. Sellers today are also enjoying near historically high prices for the simple reason that a buyer’s ability to pay is being driven by the low cost of debt and aggressive underwriting by financial institutions.
The reality of today’s investment market is the longtime fantasy of self-storage being considered a core asset and, more important, priced like a core asset is coming true. This will continue for the foreseeable future, as the self-storage fundamentals (supply and demand) are strong. One note of caution, though: Self-storage investors should be wary of new development in their markets, as developers are beginning to enter the picture once again.
It’s important to understand the cap rates indicated in the chart are a broad look at the market, and it doesn’t mean that every self-storage property is a 6 or 7 cap deal. Today more than ever, we need to be realistic and understand there’s a bifurcation in the market between institutional-quality deals in major metropolitan statistical areas, which account for only about 10 percent of self storage properties in the entire country, and the rest of the market. The vast majority of the self-storage deals we see now are trading at 8 percent to 10 percent cap rates, and will vary significantly based on the location, quality and features of the specific property.
However, the chart does indicate why self-storage values are near historically high prices and why buyers today are still very aggressively purchasing assets. The low cost of debt and strong self-storage fundamentals have created a perfect scenario for buyers and sellers alike.
Ben Vestal is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self storage buyers and sellers and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE; e-mail firstname.lastname@example.org. To learn more about cost segregation and accelerated depreciation, visit www.argus-selfstorage.com.