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. Todays 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, were 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 Ive outlined some observations and deal characteristics that will give you the sense that nows 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.
While there may be many reasons for the difference in cash-on-cash return and facility value, most will likely relate to the number of buyers and sellers in the market rather than some intrinsic valuation issue. When you consider that a self-storage market is measured by an approximately five-mile radius around each property, the difference between a major- and secondary-market property is less about the city or town in which a facility is located and more out its specific position within that municipality. In other words, a well-located property in Ft. Collins, Colo., or Oklahoma City, Okla., is probably equal to a comparable, well-located property in Los Angeles or Montclair, N.J., as it relates to the propertys ability to generate a stable and growing income stream.
A Blessing and a Curse
One of the main reasons self-storage is such a great real estate investmentthe lack of glamour and egois both a blessing and a curse. You dont buy a self-storage facility to show it off to your golfing buddies. It's a blessing because all the value comes from the cash flow and not ego satisfaction. The curse, however, comes when you sell your property.
Buyers are seldom so smitten with a self-storage property that they fall in love with it and forget about the numbers. In almost every case, the buyer knows the market cap rate and operating costs and refuses to overpay for a property.
Clearly, theres value in understanding what affects the market cap rates in self-storage. The reward is obvious and makes the game worth playing, but the trick is to make sure the difference is really in the price and not the market or quality of the project!
Its easy to see why the former ugly duckling of real estate now enjoys the respect of all types of investors. The potential for growth in secondary markets combined with the impressive cash flow has elevated this opportunity to a whole new levelone that will rival the most glamorous of property types for years to come.
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 b[email protected]; visit www.argus-selfstorage.com .