What do you think is the hottest commodity on the real estate market right now? Buying a home, commercial real estate? Surprisingly neither. In fact, it may surprise you to know that thanks to a number of contributing factors, low capitalization rates being the largest, self-storage facilities are currently the biggest-ticket properties in commercial real estate.
Less than a year ago, cap rates on this type of space was around 7%, which was even lower than the 9% experienced during the financial downturn of 2009. However, a recent deal between Acadia Realty Trust and Storage Post signaled the beginning of even lower cap rates on these properties, ones usually found in deals with much more luxurious buildings.
For clarity, capitalization rates are determined by dividing the annual net income of a property by its price, which essentially tells an investor what the building yields on an annual basis. As the amount that an investor is willing to pay for a building rises, the cap rate falls. In other words, falling cap rates means rising values.
Other deals like the one mentioned above have become more common in recent months and have caused some investors to start taking notice of this growing sector.
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According to Wall Street Journal real estate analyst A.D. Pruitt, “Self-storage facilities are now the biggest ticket properties in commercial real estate.”
Before that, self-storage had long been a sleepy market, one that consists of about 55,000 properties nationwide. Self-storage owes its growing appeal to a perception among investors that the industry is a countercyclical property type, based on peoples growing need for storage. Also since the debut of the popular reality show “Storage Wars” in 2010, the industry as a whole has been thrown into the limelight.
Rental and occupancy rates are also contributing to the growing interest of this sector. The industry now enjoys record-high occupancy rates of around 90%. In the El Paso and San Antonio markets for example, occupancies are holding strong in the high-80s and mid-90s respectively. Landlords also have been raising rents 5% or higher over the past couple of years on existing tenants, which as a result increases cash flow.
There are four publicly-traded REITs that make up the $34 billion self-storage REIT sector. These include Public Storage, CubeSmart, Extra Space, and Sovran Self Storage, all of which are beginning to expand as well by buying up these smaller facilities and pursuing far-reaching dominance in this real estate sector.
Operators are also benefiting from low competition because there is very little supply. Right now there are about 200 self-storage facilities currently under construction nationwide, compared with the 2,500+ facilities that were developed between 2003 and 2007. Until there is another wave of development that saturates the market, high valuations for self-storage properties are likely to stick for a while.
Over the last five years, there has been an average of $1.5 billion worth of self-storage investment sales each year. There was $2.1 billion worth of self-storage investment sales in 2012 alone–the most since 2007.
All things considered, it is easy to see that the self-storage industry is a prime market for investment and one that shouldn’t be slowing down anytime soon.