Over the past 20 years, public perception of the self-storage industry has changed dramatically, as well as the profile of industry investors. Gone are the days when almost all our investors were entrepreneurial, mom-and-pop entities who looked to benefit from their ability to effectively manage these assets. Today’s investors take a more institutional approach.
This change has caused the pricing for certain assets to reach historically high levels, and many entrepreneurial investors are simply looking elsewhere for compelling opportunities. However, in light of mainstream real estate investors now racing to our business, I believe self-storage still presents a better prospect today than any other asset class.
As we continue down the road of the next real estate boom, we’re being forced to be more creative, invest smarter and, most important, seek promising investments that are outside the box of traditional criteria. I often find myself pondering what might be the next great opportunity, and I think it's no doubt in secondary markets! Below I’ve outlined some observations and deal characteristics that will give you the sense that now’s the time for secondary-market deals.
The self-storage business is all about cash flow. In the major markets, prices are higher per dollar of net operating income (NOI), which translates to lower capitalization (cap) rates, than in secondary markets. As indicated in the accompanying table, the secondary-market property has a 13.76 percent cash-on-cash return, which is a 57 percent greater return than that of the major-market property, which has an 8.75 percent cash-on-cash return.