The demand for quality self-storage facilities in the Southeast states continues to grow, creating a compressed spread between the first- and second-tier markets. With fewer facilities available for purchase in the major markets, however, some buyers are considering the more favorable prices and availability of properties in the second-tier markets. The following real estate experts discuss capitalization (cap) rates, rental rates, the affect of capital gains taxes and the overall operating performance in their areas:
- W. Frost Weaver, Weaver Realty Group, Jacksonville, Fla.
- Bill Barnhill, Shannon Barnhill Barnes and Stuart LaGroue, Omega Properties Inc., Mobile, Ala.
- N.J. “Joey” Godbold, Percival McGuire Real Estate, Charlotte, N.C.
Are you seeing the cap-rate spread between first- and second-tier markets compressing?
Barnhill: The demand is intense for first-tier properties due to the larger buyers chasing deals with large amounts of cash. This has compressed the cap rates for first-tier properties. More buyers are resorting to second-tier markets by necessity to obtain a positive spread between the interest rate and cap rate. This has put more pressure on demand and is beginning to compress cap rates on second-tier properties.
Godbold: What we’re seeing in the Carolinas is the definition of first-tier and second-tier markets is changing. Institutional buyers coming into the Carolinas are targeting the two larger and fastest growing markets—the Raleigh and Charlotte metropolitan statistical areas. Those two markets, from the perspective of true institutional buyers, were considered second-tier markets several years ago. Now they’re target markets and command aggressive cap rates. Mid-size cities in our area remain attractive to regional and, to a lesser extent, national buyers, but we still see a cap rate spread of 50 to 100 basis points. Smaller markets, of course, exhibit greater spreads.
Weaver: While there have not been many recent transactions in Florida to truly develop a trend, based on the self-storage projects we’re working on, it appears there’s at least a one-point spread in the cap rates between the first- and second-tier markets.
What are the current trends in rental rates in your major markets? Are you seeing rates rising as the market continues to improve?
Barnhill Barnes: The current trends in rental rates for Alabama and Northwest Florida remain mostly flat. With that being said, some facilities are increasing their rental rates on current tenants whose rents are below the street rate. Many facilities are adjusting rental rates upward or downward depending on the vacancies for each unit size, according to our markets surveys. Overall, the rental rate changes we’re seeing are very specific to each market area.
Godbold: We’re seeing less pressure to keep rates down. Managers are less reluctant to experiment with rate increases for new and existing tenants. Overall, we’re seeing gradual increases in rents, but not significant jumps. What’s harder to track is the level of discounts. I sense that those discounts are given more sparingly than in the past few years.
Weaver: Rental rates have risen during the past year in Florida along with the general real estate economy. This seems to be true in the smaller markets as well. So far, these increases are in the 5 percent to 8 percent range.
What market areas in your territory present a good outlook for self-storage?
LaGroue: In addition to the primary markets in the Southeast, there are several secondary and even tertiary markets that present a good outlook for self-storage. It seems that so many of the larger operators tend to overlook these markets for a variety of reasons, including operational efficiencies, economic concerns, etc. This really opens the door for some of the smaller operators, including regional and local players, to expand their footprint while enabling them to achieve operating efficiencies.