Industry Outlook for 2008

Over the past five years, the median price per square foot for self-storage has gone up 39 percent to $68.30. While the increase lags other major property types, self-storage offers above-average cap rates. At 7.6 percent, the average cap rate is 30 to 120 basis points above those registered for other property types. Higher cap rates, combined with the probable long-term health of the industry, should continue to lure investors away from the other assets.

Despite solid fundamentals and strong returns, transaction and sales velocity were down as of the third quarter of 2007. Financing and economic worries dampened investment activity across all core product types, save office assets. Self-storage transaction activity dropped 7.5 percent year-over-year during the third quarter; however, this is significantly less than the decreases registered in apartment, retail and general industrial property sectors. Activity is expected to pick up this year.

Asset focus will vary among buyer types. Larger, cashheavy buyers are expected to favor in-fill class-A space where construction costs make additions to supply difficult. Specific attention will be paid to properties that offer amenities focused at frequent users and those in areas that do not rely on relocation-generated demand. Smaller buyers, on the other hand, will target value-add opportunities priced well below replacement costs.

The trend of developers trading properties in rent-up at certificate of occupancy has subsided. Lending requirements and closer investor scrutiny of financials have all but ceased the trading of assets on pro forma numbers. Developers may be faced with waiting until breakeven points to sell for the foreseeable future.

Looking forward, modest employment growth and continued economic expansion, albeit at a slower pace, are expected to support commercial real estate assets across property types. As underwriting standards become more stringent, investors may choose to seek out self-storage assets, drawn by elevated cap rates. Moreover, investors and lenders have shown a preference for top-tier assets in prime locations, a trend that could open opportunities in many secondary and tertiary markets. With fundamentals in the self-storage market being hindered by the housing slowdown, cap rates are expected to stabilize in their current ranges. 

Steve Ekovich is the national director of the National Self- Storage Group at Marcus & Millichap Real Estate Investment Services, based in Tampa, Fla. He can be reached at 813.387.4700 or sekovich@marcusmillichap.com.