This month, I gathered real estate experts to discuss the state of self-storage in the Northeast. Lets hear what they have to say about their respective cities and regions. Our panel includes: Linda Cinelli, LC Realty, North Branch, N.J.; John Lisowski, Grubb & Ellis, Pittsburgh; Joe Mendola, The Norwood Group, Bedford, N.H.; and Chuck Shields, Beacon Commercial Real Estate, Conshohocken, Pa. My comments are in italics.
Cap rates have generally dropped over the last year but still tend to be influenced by local factors. Whats a typical cap rate on A- and B-grade projects in your area?
Cinelli: A-grade projects are in such demand that investors will pay 7.5 percent to 8 percent cap rates. We were recently outbid on an A-grade location for which the winning buyers felt the potential for occupancy was worth the lower cap rate. B-grade projects are also in demand, but the buyers are more conservative and want to see cap rates in the 8 percent to 8.5 percent range.
Lisowski: In Western Pennsylvania, cap rates for A-rated facilities are in the 9 percent to 10 percent range. B-rated facilities trade in the 11 percent to 12 percent range. Most buyers tend to be local investors familiar with the industry. The population in the area is stagnant at best (declining in most areas), which causes concern regarding future occupancy and expansion.
Mendola: Cap rates for A-grade properties in New England are about 8.5 percent. There are very high barriers to entry and room for expansion. B-grade properties have cap rates in the 9 percent to 9.5 percent range. These properties offer good cash flow but not much near-term upside.
Shields: In my region, the cap rates are not as aggressive as in other parts of the country. An A-grade project might see a cap rate in the 8 percent range, and a B-grade project could be a point higher.
Cap rates vary by location, even within the same city. It appears buyers, while still willing to pay higher prices, are becoming more selective about location and quality.
Are you seeing rental-rate increases? What is occupancy like in your territory?
Cinelli: Rental rates for larger units in the area are lower, but rates for smaller units are higher. Occupancies are declining because as more facilities come into the market, existing ones are offering significant deals to keep their business. Overall occupancies can range from 75 percent to 80 percent, although some can be as high as 98 percent.
Lisowski: For the most part, rental rates and occupancies have remained relatively stable, with the exception of an occasional special such as first month free. Overall occupancy is in the 85 percent range.
Mendola: The New England market is in an equilibrium mode, with rental rates holding steady. Occupancies are also stable, and they probably wont move until we get a catalyst for demand. The marketplace is about 83 percent occupied. However, if a facility is sitting at 65 percent occupancy, it will have to do some aggressive marketing to get up to 85 percent.
Shields: Rental rates have increased in Eastern Pennsylvania and Southern New Jersey, with occupancies remaining high. There doesnt seem to be the usual winter declines. On average, occupancies are 80 percent and higher for most established facilities.
There seems to be justification for owners who begin to worry about overbuilding. I also hear that because of increased costs for gasoline and heating bills, many people have less disposable income, which can affect their decision to rent storage.
Has there been a marked increase in planned and new projects in your area? Are these facilities larger with more amenities?
Cinelli: It seems there are more buyers for approved sites, since entitlements are such a problem in most states. For example, the approval process is extremely difficult in New Jerseyany elevation must be attractive and not look like storage. In New York, approvals vary, but they havent reached the same challenging level. Buyers feel its better to build vs. buy existing facilities at low cap rates. The sites being built are more high-tech and sophisticated to attract customers. Buyers are especially big on visibility and retail locations, and will pay top dollar in some cases.
Lisowski: There hasnt been a marked increase in new construction in this market. In the larger metropolitan areas, there is some construction as the population shifts to the outer suburbs. In this case, we might see some new facilities, but not any of major consequence.
Mendola: New facilities in New England have dropped off in general, but theyre still popping up in special situations. These facilities tend to be more state-of-the-art.
Shields: Im seeing a lot more largescale, new developments, with more amenities such as upgraded technology, security, aesthetics, landscaping and, most important, climate control.
Clearly New Jersey is a hot spot, but remember that overbuilding can occur in a single micro trade area and still be devastating to existing owners in the market.
What things do potential buyers most like and dislike about a property?
Cinelli: Buyers like the opportunities for expansion that exist in areas of increased residential growth; but many dislike the fact prices are too high and they wont be able to reach the returns that were available for the initial investor.
Lisowski: First and foremost, buyers like the potential for a steady stream of income and positive cash flow. Second is the possibility of future increases in value if the facility is strategically located in a growth area. On the other hand, buyers worry about future occupancies if the population experiences a continual decline.
Mendola: Buyers like properties with expansion possibilities and high barriers to entry as well as highly visible locations. They dont like properties with unstable occupancy in flat markets in which price is based on low cap rates at stabilized occupancy.
Shields: The No. 1 thing I see buyers looking for is the ability to add value. This is done by raising rates and expanding to meet demand. They dislike high asking prices with unrealistically low cap rates to justify them.
We can see that buyers are getting pickier.
Is bank funding available for facilities in your area? What would financing terms look like?
Cinelli: Lenders base their decision on the strength of the borrower first, then on experience and cash-flow projections.
Lisowski: Bank financing is available for buyers in the market. Typically, one would see a term of 15 years and rates in the 6.5 percent to 7.5 percent range, depending on the facility.
Mendola: Bank financing is available, but the feasibility study has to be detailed and good at measuring pent up demand. The rates are climbing to 7 percent and 20-year amortization with a fixed rate for five years.
Shields: Bank and conduit financing are available for existing facilities, but construction financing is a little harder to find. Construction financing might be obtained with 300 basis points above treasuries with interest-only payments for 24 months. Conventional financing might see 7 percent. Conduit financing might be about a point lower, with a term of 7 to 10 years and amortization of up to 20 years.
The money is still available but more expensive than in recent months, which may slow builders down a little bit. But as long as sale prices remain high, the economics will still work for most developers. Cinelli makes the point that if the buyer has strong enough credit, the lender will approve any project and loanthats where really bad (rate-busting) projects are born.
Michael L. McCune has been actively involved in commercial real estate throughout the United States for more than 20 years. Since 1984, he has been owner and president of Argus Real Estate Inc., a real estate consulting, brokerage and development company based in Denver. In 1994, he created the Argus Self Storage Real Estate Network, now the nations largest network of independent commercial real estate brokers dedicated to buying and selling self-storage facilities. For more information, call 800.55.STORE; visit www.selfstorage.com.