In basketball, rebounding is always an important component to winning. Rebounding also occurs in real estate, as capital markets and economic conditions vary. In 2010, self-storage is rebounding from the declines of the prior two years.
“Market activity is definitely increasing, driven by special servicers and banks divesting of problem properties,” said Steve Hrysko, vice president of the CB Richard Ellis Self-Storage Advisory Group. Indeed, an analysis of the first quarter of 2010 indicates an increase of nearly 20 percent in transaction volume over the same period last year. In addition, most observers expect market activity to increase throughout the remainder of this year.
For self-storage, rebounding may be too strong a term because of the stability of the asset class. The National Self-Storage Trends chart below shows stability in the early part of the last decade, and then a dramatic rise from 2002 through 2007. In all categories measured, including average price per square foot, total sales volume, net operating income (NOI) and cap rates, the asset class showed strong increases. Even during the recession of 2008-09, these variables declined but were relatively stable.
The increase in transaction volume suggests many players believe the market has bottomed out, and it’s a good time to strike. “Many believe now’s the time to get back into the market, before it’s too late,” said Greg Wells of the Cassidy Turley/BRE Commercial self-storage group. “A year ago, major buyers were not actively in the market. Now public and private money, and national and regional operators, are all back in the acquisition game.”
For example, Public Storage acquired a 30-property portfolio from A-American Self-Storage for close to $190 million. The deal included 28 properties in South California and two in Chicago, reportedly at a sub-8 percent cap rate on a trailing 12 months NOI. Another 54-property portfolio is on the market by A-American Self Storage, with six qualified investment groups seeking the assets. This is the first strong portfolio activity since early 2008. There’s also a 14-property portfolio being listed and another 20-plus property portfolio preparing to go to market.
New investors and veteran players have come to the self-storage asset class. Crossover investors new to the industry are descried as those invested in apartments but like the higher returns and lower loss ratios of self-storage. Veteran players include nationwide companies such as Strategic Storage Trust, W.P. Carey, the real estate investment trusts, and smaller regional companies such as Equity Based Services.
For single-asset owners or small ownership entities, concerns over refinancing in the future are driving interest in selling now. Even assets operating on a stabilized basis may be facing a capital call for more equity to refinance existing debt. Some owners are opting to cash out equity now rather than face putting more equity into a property, even if the property has strong cash flow.
Plans for the Next Game
Self-storage has proven to be recession-resistant, especially when compared to other asset classes in this economic recession and capital-markets depression. So what’s the plan for the next game?
In general, the outlook is bullish for self-storage. Owners with strong balance sheets will continue to enjoy cash-flow returns. Banks and commercial mortgage-backed security (CMBS) lenders with problem properties are choosing re-trade over foreclosure.
As an example, there’s a deal under contract in South California that has assumable CMBS financing to a qualified buyer, but with only a 10 percent down payment. The property was stabilized, but the owner could not pay down more equity to the debt. The lender sold the property instead, and the borrower pulled out remaining equity.
Capital chases yield, and equity capital is seeking storage in this asset class. Cap rates are declining slowly as values remain below replacement cost with little new construction. Cash flows are generally stable, with recessionary related declines now stabilizing and a general view of more optimism regarding the future. The summer rental activity will be the key metric of investor confidence for the balance of the year.
While some market observers worry about problem assets flooding the market, there’s little evidence that’s likely to occur. Typically, less than 1 percent of self-storage assets have been on a lender “watch list,” and less than 10 percent of these loans have gone to special servicers. Even if special assets double or triple in the next few years, there’s equity waiting to acquire the assets or debt.
The self-storage market is rebounding ahead of other real estate asset classes. This is another market determinant that indicates the strength and durability of self-storage cash flow. As equity is returning, market conditions are improving. Many believe 2010 will be the rebound year for self-storage.
R. Christian Sonne is senior managing director of Cushman & Wakefield’s Self-Storage Industry Group, a nationwide real estate consulting team of 12 professionals specializing in appraisal and market study of the self-storage asset class. To reach him, e-mail [email protected].