The Current State of Self Storage
According to recent data, the self storage market improved significantly beginning in 2010, with over $1 billion in equity money chasing yield in self storage. Public and private REITs as well as large national and regional self storage companies have gotten back in the game. As of 2011, nationwide single asset transactions are up 35% or more. Other findings show increased optimism for self storage as well as lower capitalization and yield rates. According to 2011 data, marketing times are declining, absorption times are improving, and new construction is at a 10-year low.
Capitalization and yield rates have shown modest declines. At the end of 2009, it appeared that capitalization rates were headed for 9% territory. With new capital (both equity and debt), capitalization rates have stabilized and now appear to be declining. For example, 2012 capitalization rates have decreased over 100 basis points to an average of less than 7.50% (stabilized) from the prior year.
In 2009, the greatest investor concerns were related to the cost of capital; highly leveraged owners worried about increasing interest rates and declining values, a “double negative” to cash flow. This uncertainty was made worse by rating agencies’ concerns over relaxed underwriting standards in the commercial mortgage-backed security (CMBS) market (in addition to losses of subprime residential loans in 2007). Many players feel that now is the opportune time for acquisitions at below-replacement costs, especially with interest rates at historic lows. In this regard, investors are placing more emphasis on equity dividends beginning at 5% and equity (levered) yields beginning at 14% for single assets. The focus is clearly on cash flow on income in place. As of this writing, capitalization rates on existing income have decreased for properties with upside potential in rents or occupancy.
Lending is still facilitated by large national banks and smaller local ones. However, low-leveraged financing is available from life insurance companies for properties with strong balance sheets. Beginning in 2010, even CMBS lenders returned to self storage. Lending criteria typically include recourse loans at loan-to-value ratios not exceeding 72%, debt coverage ratios starting at 1.25, amortization over 25 years, and interest rates reportedly in the -5% to 6%+ range. According to recent data, most respondents still described market conditions as oversupplied. However, on a scale of 1 lowest to 10 highest, the optimism index increased to 6, up slightly from 5 in 2009.
Cumulatively, the data reflects the macro concerns of the economy:
- Employment
- Inflation
- The housing downturn
- The credit crunch
- Consumer confidence
Micro concerns of the asset class include overbuilding and uncertainty about interest rates. However, self storage has been resilient, with stable property fundamentals. One view is that housing downsizing has led to an increase in demand for self storage. Another view is that decreasing household income and deteriorating consumer confidence will cause customers to budget more carefully, decreasing the demand for self storage. Historically, national self storage vacancy rates have generally been 20% or less through both upward- and downward-moving market cycles.
Real estate economists are always wary of predicting the date or time of changing market conditions. Therefore, noting the concerns of the market is good for self storage market conditions over the long run. Because self storage is a neighborhood-specific asset with wide variances of market conditions, even within a particular city or metropolitan statistical area, local research remains the most important tool for investors.
Purchase the Appraisal Institute’s new release, Self Storage Economics and Appraisal, at www.appraisalinstitute.org/selfstorage
