The self-storage real estate market has experienced an uptick in sales over the past year, with investors once again looking for quality assets to add to their portfolios. In this article, real estate experts representing self-storage markets in the western states discuss trends in capitalization (cap) rates and sales, and areas ripe for new development. The contributors are:
- Jim Berry, CRG Utah, Salt Lake City
- Steve Boldish, Coldwell Banker Commercial NW, Medford, Ore.
- Alan Davidson, Realty One Group, Laguna Niguel, Calif.
- Tom de Jong, Colliers International, San Jose, Calif.
- Jeff Gorden, Eagle Commercial Realty Services, Phoenix
- Joan Lucas, Joan Lucas Real Estate Services, Denver
- Jason Wilcox, Gleason and Co. Commercial Real Estate, Kent, Wash.
What are the cap-rate and sales trends in the first- and second-tier markets in your state?
Berry: There has been little evidence of cap-rate compression between first- and second-tier markets in Nevada and Utah. Asking rates are, for the most part, still in the 6.5 percent range, with deals being finalized around 8 percent. However, that may be about to change. Theres one second-tier property now in the market with a listed rate of 8 percent, and it will likely sell above the asking rate.
Boldish: Oregons first-tier market areas of Portland and Salem have not seen a drop in cap rates from those statewide and continue to sell in the 8.5 percent to 9 percent-plus range. Buyers are seeking the Portland market, but good properties are difficult to find as owners are not inclined to sell. [Online real estate listing service] Loopnet has reported six sales statewide year-to-date, with all coming in second- and third-tier markets. The largest property is just under 25,000 square feet.
Davidson: As available properties are in scarce supply in the major metropolitan areas of Southern California, buyers are casting a wider net into the less populated areas such as the Santa Clarita Valley, the high desert (Victorville/Bakersfield) and the low desert (Palm Springs/Palm Desert). Some examples of recent sales include a 9.58 percent cap in the L.A.-metro area; a property in an outlying county traded at a 9.95 percent cap; and a facility in the high desert sold at a 7.5 percent cap. Cap rates in the major markets have little room to compress, and buyers are willing to pay a premium for properties in outlying areas, rather than overpaying for similar product in the coastal areas.
de Jong: Northern California has seen a compression of cap rates between facilities based on location and quality. Facilities in second-tier markets are generally seeing a lot of interest, although more from local or regional investors, not as much from the institutional or public entities.
Gorden: In 2012 we saw a reappearance of true market-rate sales of self-storage facilities in Arizonas second-tier markets. During the period from 2009 to 2012, there were less than a half a dozen trades in these areas, and all were at some point along in the foreclosure process. In Phoenix and Tucson, cap rates have fallen considerably, and theres just enough interest now in secondary markets to gauge the return premium for comparison. There has been a shortage of available product in the first-tier markets, and communities with a solid employment base will fare well in the coming year as investors look to close deals.
Lucas: Colorado is a bit of an anomaly in that we dont see properties turning as often as in other states. Packages of two to four properties that we consider B or B-plus are commanding stronger rates than in last several years. The reason is simple, the class-A sites just arent for sale at this time. So if buyers are looking in the Colorado market, theyre relegated to acquiring properties less than institutional grade but with big prices. Older, first-generation properties in outlying cities are suffering a bit because theres less demand, thus lower prices.
Wilcox: Cap rates in Washington state averaged 8.4 percent in 2012. Tertiary markets ranged 9 percent to 11 percent, while facilities close to larger metros ran between 6.25 percent to 7.7 percent. I havent seen evidence of cap-rate compression in the tertiary markets. Many investors with whom Ive spoken have expressed theyre being very careful in their site selections, which is reflected by the relative lack of recent sales activity.
What markets in your area present a good opportunity for new self-storage development?
Berry: There are still "free rent" signs in Salt Lake City, and occupancy rates are running as low as 60 percent in some properties. Im aware of occupancy rates in the Reno area as low as 65 percent and in the Reno suburban markets as low as 50 percent. Overall, Utah and Nevada will not likely see an increase of development for some time.
Boldish: Oregon continues to suffer higher unemployment rates than the national average. Other than Portland-metro, all other areas in Oregon are second- and third-tier markets. Southern Oregon is overbuilt at this time, with owners slowly increasing occupancy, but with rental rates still equal to or trailing those of four to five years ago. Portland, Salem and Eugene are still good markets for existing storage properties. Buyers have also been seeking under-performing properties and bank foreclosures rather than new construction.
Davidson: Orange County is the current job engine of Southern California, with Los Angeles a close second, followed by San Diego. San Bernardino and Riverside counties continue to lag behind. The economic bottom has been reached and a long slow climb upward is likely. Population centers are experiencing increased density, and most urban areas are fully built out. As a result, improving existing facilities or converting existing space is usually the least expensive option to meet future demand. Development sites are rare except in outlying regions, and only well-organized and -financed groups will be able to devote the financial resources and time necessary to build new product.
de Jong: Weve seen four facilities built in the past 18 months in the Silicon Valley, mostly on arterials and in-fill locations. The residential market is continuing to improve throughout most of the Bay Area and, as such, we should continue to see quality development opportunities. The biggest challenge were facing is the rising cost and lack of availability of quality sites. Prices for residential land have been reported at close to $100 per square foot in some Bay Area markets, driving the cost of industrial/commercial-zoned land to as high as $40 to $50 per square foot, a challenge for most self-storage developers.
Gorden: There are several areas that present great opportunities for self-storage in Arizona. There are growth areas in the southeast and northwest Phoenix suburbs of Gilbert and Surprise, respectively. New-home sales are brisk, and theres steady job growth. Across the state, boat and RV storage has weathered the recession well and is a strong performer in middle- to upper-income communities and those near recreation areas like Lake Havasu City and snowbird havens like Yuma.
Lucas: There are very few places in the Denver market that could really use another self-storage facility. However, we just completed a study to take a look at whats currently on the drawing boards and were amazed to learn there are 13 facilities totaling well over 1 million square feet in the development pipeline across the Front Range. This is not good news and shows we may be heading into another cycle of overbuilding in the near future.
Wilcox: Nationwide, self-storage supply is estimated at 7.3 square feet per capita. The state of Washington has an above-average supply level at 10.8 square feet per person, and while core metros are slightly overbuilt, occupancy levels are rising. With the delivery of two new facilities in 2011 (Federal Way and Issaquah) and another project in progress in Kirkland, market confidence for long-term demand remains strong.
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] .