Capital flow, both equity and debt, continues to find superior returns in the self storage sector. Based on total returns by property sector published by NAREIT, self storage outperforms other core sectors such as apartment, office, retail, industrial and office with five-, 10- and 15- year returns of 18.85 percent, 20.48 percent and 16.54 percent, respectively.
Continued gains in cash flow have sustained confidence throughout 2013. For example, as of Q2 2013, asking rents in self storage are up 1.1 percent over the prior year, physical occupancy is up 2.6 percent over the prior year and rental income (collected rent) is up 4.1 percent over the prior year. Such robust performance in terms of occupancy and income is a function of strong market fundamentals with respect to supply and demand. As of last quarter, there were only 30 “new start” projects nationwide and only 123 nationwide over the prior four quarters. Based on a total stock of approximately 46,000 facilities, new supply is nominal (reported in the Self Storage Performance Quarterly).
The Self Storage Industry Group at Cushman & Wakefield tracks data on over 8,500 facilities in the U.S. ever quarter, with a concentration on the top 50 MSAs, reflecting a sample size of 18.8 percent of all facilities, but 49.2 percent of facilities in the top 50 MSAs. There patterns of growth have continued over the past three years, after the hangover from recession bottomed out mid-year 2010.
As a result, acquisitions have remained robust with over $2 billion in portfolio acquisitions over the past year or double the pace of the prior two years. For class A product, self storage cap rates are generally 6.5 percent or less. Portfolio premiums are commanding reductions of 100 basis points or more in cap and yield rates. Leading the charge in acquisitions are self storage REUITs, non-publicly traded self storage REITSs and national investors. New to the party are “crossovers” such as buyers from the apartment sector, who like the superior returns of self storage with low-cap expenditures.
Investors are being more selective, segmenting cap rates by investment quality. For example, a class A facility (physical and investment quality) can vary by 175 basis points compared to a class C facility. More detailed data from the survey results demonstrates market segmentation:
Class C is defined as:
- Secondary, less-desirable locations with generally poor access and limited visibility
- Construction quality ranges from fair to average
- Maintenance ranges from fair to average with minimal or no security
- Generally managed by the owner and may not have an on-site manager
- Typically older facilities with growing functional and/or economic obsolescence
Over the last five years, investor analytics have increased. Discounted cash flow analysis is the preferred methodology as a result of revenue enhancement models. For self storage, street or asking rental rates change at a slower pace than actual rents in place. As the coast and use of concessions declined, actual or collected rent continues to rise. With the ability to raise rents at any time on monthly contracts (not leased fee), collected income continues to grow.
Looking ahead, domestic self-storage performance metrics are forecast to remain strong. Cap rates re forecast to continue to decline, even as acquisitions increase.
Class B is defined as:
- Average location, access and visibility
- Construction quality ranges from average to good
- Maintenance ranges from average to good
- Security ranges from average to good
- Full time on-site and competent off-site management
Class A is defined as:
- Located in one of the top 50 MSAs, usually with high barriers to entry
- Excellent location and access to attract tenants willing to pay rents in the upper percentile in the marketplace
- Superior construction and finish
- Characterized by above-average maintenance and security
- Professional on-site and off-site management
By R. Christian Sonne, MAI, MRICS – Cushman & Wakefield