The self-storage real estate market continues to improve in many areas of the country, including the northeast states. However, the number of quality, stabilized facilities available for purchase is beginning to dwindle, forcing capitalization (cap) rates to compress in some markets. The following real estate experts discuss cap rates in first- and second-tier markets, loan availability, and which regions are prime for investors.
- Guy Blake, Pyramid Brokerage Co., Newburgh, N.Y.
- Linda Cinelli, LC Realty, North Branch, N.J.
- Joe Mendola, NAI Norwood Group, Bedford, N.H.
- Chuck Shields, Beacon Commercial Real Estate, Radnor, Pa.
Are you seeing the cap-rate spread between first- and second-tier markets compressing?
Blake: In upstate New York, the short answer is yes, although there are a host of other factors at play. Demand for quality, stabilized facilities remains strong, so cap rates on those facilities have been compressing as more and more buyers chase fewer and fewer deals. The markets are still very risk-averse, however, so opportunities such as distressed facilities or those with high vacancy rates are still very difficult to move at any price.
Cinelli: The New York/New Jersey market has shown a strong interest from buyers. With good product at a premium, cap rates have hit as low as upper sixes to low sevens. In high-density areas, the occupancies have increased, resulting in higher net operating income (NOI). Our second-tier markets, while not demanding the lower cap rates, are showing a strong buyer interest with cap rates between 7.5 percent and 8.5 percent.
Mendola: In the northern New England market, owners have realized how powerful an investment like self-storage is in an economy that prohibits investors from earning a satisfactory yield on their investment without taking on high risks. Consequently, there have been very few facilities sold in 2012. There have been none sold in the first-tier markets, so there has been compression on the second-tier-market cap rates. This is partly because of the limited product available and partly because of the low cost of borrowed funds. Cap rates are down to a range of between 8.25 percent and 8.75 percent.
Shields: The strengthening competition among investors for product (stabilized, quality assets) results in higher values, thus the decrease in cap rates. It seems that the higher-tier markets in Pennsylvania are seeing 8 percent to sub-8 percent cap rates, while the second-tier product will realize a 9 percent to 10 percent cap rate. For example, recently in a second-tier market, there was a two-facility transaction with 95-plus percent occupancy and low expenses that sold at a 10 percent cap rate.
What market areas in your territory present a good outlook for self-storage?
Blake: Self-storage is a now a mature industry, and New York and Connecticut are mature markets. Were not expecting any dramatic population growth, and many markets are already over supplied with self-storage. I do not see any significant new construction occurring for several more years.
Cinelli: The New York and New Jersey markets have a strong consistent demand, and the rental rates are higher here than in most of the other states. With the last few years of basically no new ground-up facilities, the demand had met the supply for the most part. We now see new construction opportunities and conversions. The suburban markets have shown stronger occupancies, and the housing market is starting to show activity for new developments. This is a slow recovery, and it will be some time before the pipeline gets the activity we did in the past, which made the demand for self-storage in the second-tier market.
Mendola: The markets for self-storage are very much in equilibrium in the northern New England markets. Consequently, its difficult to obtain financing for new construction for projects of any size. With the widening of Interstate 93 in the southern counties of New Hampshire, theres growth anticipated. However, two new projects have already begun construction in the market area. This new supply will move absorption rates to new levels if the increase in population does not materialize. The markets in the other states in northern New England have the similar demographic makeup, where supply and demand is in equilibrium. The population trends in these markets are fairly stable.
Shields: Ive found Northeast Pennsylvania to be a constant source of self-storage activity. It has experienced a steady growth of residential and retail development. With its proximity to North Jersey and New York City, its a commuter community while enjoying a more moderate cost of living. Conversely, it serves as a second residence in a resort/vacation area for the same New Jersey/New York market. With this and a few other factors, self-storage will continue to have a demand in this market.
What is the status of financing for experienced self-storage buyers?
Blake: Theres money to be had these days provided youre buying a cash-flowing facility. Lenders are being just as conservative as buyers, so getting financing for quality, stabilized facilities is relatively easy. For distressed or high-vacancy properties, however, its much more difficult. Banks are still not lending on pro forma numbers.
Cinelli: Financing can vary depending on the deal size. On many of the larger deals, were seeing cash buyers who have their own financing in place. The buyers who require financing contingencies will need to provide strong background knowledge in the business or have a professional third-party management company handling the daily operations. We have buyers taking advantage of Small Business Administration (SBA) loans, and theyre showing success with a little patience on the time to get it done.
Mendola: The financing environment in New England is very favorable. The community banks as well as the institutional lenders are all available to lend on properties that have experienced operators as sponsors of a project. The SBA is also providing capital for these projects.
Shields: The status of financing for self-storage has been strong with banks becoming healthier and the need to get their money on the street. Investors are finding more debt options available to them. I hear conduit loans are becoming more available with rates around 4.5 percent with 10- to 25-year terms. SBA has been finding its way into the self-storage market. All in all, if you find a facility to purchase and the conditions are right, you should be able to finance it.
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 [email protected] .