Section 11 • Cap Rates
• With more sophisticated and creative management and marketing, facilities are able to maintain high levels of return in spite of higher purchase prices.
• Although occupancy has fluctuated based on the economy and seasonality, rental rates have consistently increased over the years.
Term
• Self-storage facilities are not recession proof but are recession resistant. When the economy is strong, people have the extra income to afford storing their stuff. When the market is struggling and people are moving around, there is also a need to store “valuables.”
5-Year Avg. Return 10-Year Avg. Return
construction phase of the cycle due to the current demand. Can cap rates go much lower? While we do not have the answer, these factors and others lead us to believe that there will not be a significant change in the near future.
Table 11.2 – Returns Base on Asset Class
Self-Storage Multi-Family Retail Industrial Office 24.4%
17.8% Source: National Association of Real Estate Investment Trusts Cap Rates Q&A With Top Brokers
• Self-storage is easier and less risky to manage compared to many other asset classes. Low overhead costs are attractive for entrepreneurs who invest in storage. Self- storage is an easy investment to oversee as an owner.
• Self-storage facilities are adaptable. Due to the construc- tion materials (typically metal) you can reconfigure units based on demand.
• The most successful operators in this industry have rec- ognized that income is not limited to the monthly rent of their units. Additional income generators include tenant insurance, RV/boat storage, moving truck rentals, admin- istration fees, late fees, merchandise sales, and auction services. Each market is unique!
• With limited self-storage development over the last five years, the top 50 markets need an estimated 3,500 new self-storage facilities to meet population growth and expected consumer demand during the next five years.
• Comparing overall average returns on a five- and 10-year basis, self-storage has outperformed multifamily, retail, industrial, and office investments as indicated in table 11.2.
There is no doubt that this asset class has been one of the
best kept secrets for investors over the years. So the question regarding cap rates is, “Can this trend of downward pressure continue in the future?”
Within this industry there are a handful of brokers who
“truly” specialize and have significant experience with and un- derstanding of this property type. We reached out to a handful of these brokers regarding cap rates, whose responses appear in the Cap Rates Q&A With Top Brokers sidebar.
Investors realize that this asset class historically has offered
strong returns and anticipates the same in the future. Supply is limited and demand is strong. The industry has turned to the
120 Self-Storage Almanac 2016 With national cap rates declining over the last several years
(to an all-time low), what do you think will happen with cap rates through the end of 2015 and into 2016?
“I believe overall that cap rate compression has bottomed out
and capitalization rates will slowly start creeping higher through the balance of 2015 and first half of 2016. The largest increase in capitalization rates will be in the tertiary markets and lesser quality product.”
“My belief is that we are at a once-in-a-generation peak in
prices because of the combination of historically low interest rates, lack of recent development, record occupancies, and rents leading to record NOIs. On the horizon I see a development boom happen- ing that will put a strain on existing property income. When you combine rising rates and increased supply, you will see prices drop significantly in the next two to three years.”
“An investor today can get debt anywhere in the 4 percent to
4.5 percent range and therefore can afford to buy a storage prop- erty at a 6 percent cap. An investor cannot make money paying 6 percent interest when buying a deal at a 6 percent cap. Although interest rates will rise, they will do so at a slow pace, giving the market and cap rates time to adjust.”
“The recent volatility of the stock market only boosts the ap-
peal of relatively stable storage investments. The challenge to stor- age owners is gauging the timing of potentially selling before the next wave of storage development and interest rates escalating. As real estate is a cyclical industry, the question of market satura- tion is not ‘if’ but ‘when.’”
“Portfolio valuations continue to lead the pack with 50 to 100
bp premiums being paid for large and small portfolios around the country. As we see new developments starting to come out of the ground and the ever-looming interest rate hikes, I believe we will start to see performance leveling out over the next 12 to 24 months and we can expect more normal year over year growth.”
20.6% 20.4% 14.7% 12.7% 13.7% 10.6% 6.3% 9.7%
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