With cap rates at an all time low and a significant influx of new investment capital for commercial real estate investments, the Self Storage REIT sector is Booming! According to Wall Street Journal real estate analyst A.D. Pruitt,“Self Storage facilities are now one of the biggest ticket properties in commercial real estate.” Investors are like the fact that self storage properties have high margins, consistent cash flow, and the ability to perform well in economic downturns.
Self Storage Real Estate Investment – Strong Real Estate Fundamentals Self storage property investments are now considered to be “anti-recession” type, with real estate income fundamentals that are strong. Self storage contracts are typically month to month, which allows landlords that unique ability to increase tenants’ rents fairly easily. Also, unlike other real estate assets, self storage operators do not need to pay leasing commissions and costly tenant improvements allowances.
For the year 2012, compared to 2011, rental income is up 6.6% and occupancies are up 1.6% industry wide, with occupancies around 85%.
Self Storage Facilities – High Occupancy Levels
- Eastern United States, 2012 occupancy levels were at 85%, an increase of 3.5% over 2011.
- The Western United States, 2012 occupancy levels were at 83.4 %, an increase of 2.1 % over 2011.
- The Midwestern United States, 2012 occupancy levels were at 86%, an increase of 1.4 % over 2011- this region’s highest levels since 2008.
- In the Southern United States, 2012 occupancy levels were at 83.2 %, an increase of 2.5% over 2011- the region’s highest since 2008.
The following metropolitan areas currently have occupancies at 90% or higher:
- Boston, MA 92%
- Columbus, OH 92%
- Washington, DC 91.7%
- Denver, CO 91%
- Baltimore, MD 90.4%
- New York, NY 90.1%
- Birmingham, AL 90%
- Philadelphia, PA 90%
- San Francisco, CA 90%
Impressive Returns on Investment – Self Storage Investments Last year, the four largest publicly traded self storage REITs brought in an average return of 19.11%.
Market Capitalization – Impressive The Self Storage REIT sector has a impressive market cap of $34.13 billion.
- $25.84b PublicStorage
- $4.34b ExtraSpace
- $2.06b CubeSmart
- $1.89b Sovran
- $34.13b Total
Investment Capital – High Demand and a Growing Market Sector Property sales have been very active over the past five years, with over $1.5 billion worth of self storage transactions per year. In 2012, over $2.1 billion worth of self storage investment properties sales occurred, the most since 2007.
Low Cap Rates = High Valuations A “capitalization rate” is considered the return an investor is willing to accept for the income stream from a real estate property investment. Investors are will to purchase some properties for low cap rates (or at higher prices) because they believe the property is likely to provide higher income streams in the future. Currently, self storage investment cap rates are at around 7% to 8% nationwide.
Cap rates for larger deals are 6% to 7.5% , whereas cap rates for smaller properties in secondary markets are 8% to 10%.
- Cap rates in the Eastern United States are currently in the low 8% range.
- Cap rates in the Western United State are currently in the high 7% range.
- Cap rates in the Midwestern United States are currently in the high 7% range.
- Cap rates in the Southern United States are currently in the low 8% range.
Cap rates for Class A storage assets in competitive areas, like New York City, are currently below 5%. These high valuations and low cap rates will likely continue until the next development wave
Self Storage New Development Activity There has not been much development over the past 5 years. In fact, there are less than 200 new self storage facilities currently under construction. This is an extremely low number considering that 2,600 facilities were developed through 2003 – 2007.
Graphs courtesy of The Wall Street Journal and Forbes.com. Occupancy and Cap Rate data from Marcus & Millichap. Source: John Donegan, The Storage Facilitator March 20, 2013