After a successful 2013, most self-storage operators are continuing to bask in their own glory and, in general, industry properties continue to improve. It’s now time for owners to look into the crystal ball and position themselves for success in 2014. Many indicators suggest that after exhibiting an incredible pace of recovery since 2009, the self-storage real estate sector will likely slow or flatten this year.
The year-over-year performance of the industry real estate investment trusts (REITs) started to slow as much as 200 basis points from 2012 to 2013. This, along with the decline in stock prices in November—CubeSmart at -11.22 percent, Extra Space Storage Inc. at -8.85 percent, Public Storage Inc. at -8.55 percent and Sovran Self-Storage Inc. at -12.75 percent—has left the REITs with a more than 10 percent correction in pricing.
With the unemployment rate at 7 percent, the Federal Reserve’s bond-buying program is in a position to start tapering. The potential impact on interest rates and a modest outlook on economic growth should keep a lid on self-storage performance.
Property Appreciation Slowing
Self-storage owners continue to sell primarily because of life events, with few making the decision due to a desire to capitalize on the current strong transaction market and historically high prices. The Commercial Property Price Index produced by Green Street Advisors showed commercial property prices increasing by 1 percent last November. However, the company noted that all commercial property appreciation has slowed to a near standstill over the past few months.
As you can see in the accompanying chart, we have surpassed the property-valuation peak of 2007. That would lead us to believe we're headed for a more moderate property-valuation period over the next 12 months.
Source: Green Street Advisors Inc.
While we continue to see very robust transaction volume for all self-storage properties, it’s possible transaction volume may pause in early to mid-2014, as the market may adjust to rising interest rates and the first new development of any scale in several years. We’ve started to see self-storage investors moving to smaller markets and suburban properties as they search for higher yields. I believe this will continue, as there is still plenty of capital for self-storage investment.
However, if investors are in search of bargains, they’ll need to move a bit further down the quality spectrum. For example, Moody’s Investors Service reported that over the last three to six months, non-major market prices have risen 5.6 percent, outpacing the 0.7 percent rise in major market prices.
Self-storage has outperformed almost all other real estate asset classes over the last few years, but the recent plateau by the industry REITs may be a sign of things to come. That's not to say we'll see a dramatic correction in property values or performance, but all good things must come to an end. With real estate investor sentiment remaining strong, we’ve found that the uncertainty in the market (interest rates, inflation, stock market fluctuation, etc.) may actually be increasing the demand for self-storage from large institutional investors and small entrepreneurs looking to invest in the stability of our business.
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; visit www.argus-selfstorage.com .