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Self-storage may lack the glitz of other real estate markets, but investors are starting to pay more attention to the sector now that rents are rising and vacancy rates are falling. Experts note that the self-storage market weathered the recession well and many prospective investors have noted that what can grow in hard times is sure to perform even better as the economy and other markets continue to improve. Supply is expected to double in 2014 and fundamentals to strengthen, all of which is pushing investor demand that also fuels the growing market. For more on this continue reading the following article from National Real Estate Investor.

In the past, self-storage properties were often overlooked by investors, but that’s not the case anymore. While many other sectors of commercial real estate were hit hard by the recession, the self-storage industry weathered the storm with minimal damage. As vacancy rates fall and rents grow, investor demand for self-storage properties continues to rise.

Those were a few of the points made during the most recent episode of the “Commercial Real Estate Show” radio program, on which my guests and I discussed sector fundamentals, new construction and investor appeal.

Strong fundamentals

“Self-storage isn’t as glamorous as a high-rise office building or a mall,” said Michael Scanlon, president and CEO of the Self Storage Association. “We’ve always been relegated to secondary status in the commercial real estate industry. However, during the recession, many of the big segments took a nosedive, and self-storage sagged a little but didn’t take the same nosedive.”

Fundamentals have really been improving during 2013, which is a continuation of the last couple of years, said Ryan Severino, senior economist at Reis. Vacancy dropped from 14.9 percent at the beginning of the year to 12.6 percent in the third quarter, he said. Asking rents have grown 2.1 percent year-to-date.

In 2014, vacancy rates are expected to drop by another 80 basis points, and asking rents are expected to grow by about 2.8 percent, Severino added.

“The self-storage sector is sneaky big,” Scanlon said. “In 2013, all 30 teams in the NFL generated $9 billion in total revenue, while the music industry generated about $21 billion, and self-storage generated $24 billion.”

Increase in supply

During the last couple of years, 300 to 400 new self-storage facilities have been constructed, Scanlon said. With the economy continuing to improve, it’s estimated that as many as 800 new facilities will be constructed in 2014.

“Supply is increasing relative to where it’s been the past few years, but I don’t see it being an impediment to the market’s recovery,” Severino said. “We expect to see vacancy rates continue to trend down, which means we expect to see net absorption outpacing new construction.”

Despite the amount of properties being developed, building a self-storage facility can be tricky, Scanlon added. For most investors today, due to soaring construction costs it’s cheaper to buy a facility and fix it up than to build.

“When we started, we used industrial-zoned land in heavy commercial areas for self-storage facilities,” Scanlon said. “More recently, we are building in light-commercial and semi-residential zoned areas, and we’ve had to build them with more curb appeal.”

Investor demand increases

“We are now a mainstream part of portfolios that are involved in commercial real estate,” Scanlon said. “People are hedging their bets by putting some money in self-storage.”

Investors who are interested in entering the self-storage market should consider finding a facility they like and asking to invest in the owner’s next property, Scanlon said. “Country club money is how a lot of small operators get their money to build or expand,” he said.

Before purchasing properties, investors should perform a full audit, said Scott Zucker, partner at WZEM. “It’s important to have a good idea of what’s going on inside the facility and who the tenants are,” he added.

Access to the property and new developments around the area are also important factors to take into consideration, Zucker said. “Curb cuts are there so trucks can access the property,” he said. “If there’s a lot of development in the area, road access and access into the property can be affected.”

Cap rates for self-storage are about 6 percent for class-A properties, 7 percent for class-B properties and 7.5 percent for class-C properties, Severino said. In comparison, mean cap rates for apartments are about 6.4 percent, and cap rates for retail are about 8.1 percent.

“Investors are still being choosy about what they buy and sell,” Severino added. “Transaction volumes for all property types are down relative to what they were before the recession. Even with that selection bias, self-storage holds up well relative to the other property types.”

The entire episode on the self-storage industry is available for download at www.CREshow.com. Michael Bull, CCIM, is the host of the nationally syndicated Commercial Real Estate Show and founder of Bull Realty, Inc., a U.S. commercial real estate sales and advisory firm headquartered in Atlanta.