In the second half of 2010 investors swarmed to the self storage industry, buying up businesses like they were on the clearance rack. And the 2011 outlook for the domestic self storage market has “bullish” written all over it. Niche investors and lenders are increasing movement to this sector as capitalization or CAP rates continue to decline and new investors join the buying game.
Commercial real estate acquisitions are fueled by the growth of the economy. However, the self storage industry seems to be dodging the current financial state of the nation. The real estate market is taking great notice in self storage as it looks to recent trends. In the second half of 2009, the CAP rate was 8.75 percent, the first half of 2010 was 8.45 percent, and the second half of 2010 was 7.75 percent. A CAP rate is the ratio between the annual net operating income and the original price paid or market value.
The self storage market has a long and impressive 15-year history with an average of 16.52 percent return on investment. Because the self storage market has remained strong during the economic downturn, it has received much attention, especially when compared with office, industrial, retail, and multi-family assets that average about 15.5 percent, 12, percent, 13 percent and 12.8 percent, respectively. According to the PricewaterhouseCoopers 4Q10 Real Estate Investor Survey, respondents reported an increase in transactions during the second half of 2010 citing that nearly all brokers faced multiple offers, many of which were list price.
An example of the strength of the self storage market is the recent and major joint venture between Axxess Capital Ventures LLC and former Universal Seal Storage Acquisitions to acquire self storage markets throughout the U.S. The companies plan to gain more than $1 billion in self storage units during the next several years.
But private investors are getting deals done as well, taking advantage of more readily available financing. Most of these deals, however, are contingent upon a strong balance sheet and experience with self storage management. The sources of financing for private investors are mainly community banks, life insurance companies and Wall Street commercial mortgage-backed securities.
Commenting on the state of her market in the surrounding region and predictions for the industry in 2011, Linda Cinelli said, “In our experience in New York City and New Jersey, there are no “normal” transactions in today’s market. Property values have not increased. If anything, we hope to keep them stable. Cap rates have dropped 1.5 points, with aggressive rates at 7 percent to 7.5 percent, and most offers are around 8 percent to 8.5 percent.”
Sources Used:
“Domestic Self-Storage Market Fueled By Investor Confidence.” CCIM Institute. Jan. 12, 2011.
“What Does $1B Self-Storage JV Say About the Economy.” Benzinga. Jan. 10, 2011.
Vestal, Ben. “Real Estate Market Snapshot: Self-Storage in the Northeast States 2011.” Inside Self-Storage. Jan. 16, 2011.