Markets On The Move: California

Strike While The Iron Is Hot!

The self-storage industry experienced exceptional growth in 2015, and 2016 is likely to follow suit. Of the 139 sector deals closed nationwide so far this year, 15 took place in California, according to RCA and CBRE research. Add the 22-unit and 16-unit portfolio CBRE is currently transacting, and it’s easy to talk about a record already.

So far this year, the transaction volume in this state is only third after Texas with 30 and Florida with 22 deals, according to RCA data. The highest priced transactions were two in Florida for $36.3 million and $30.8 million, respectively, followed by a deal in Maryland at $28.3 million.

According to RCA, divestitures of self-storage units nearly tripled to an estimated $4.3 billion last year. Transaction volume has ballooned, buoyed by trades of well-known self-storage-focused outfits: Extra Space Storage, Inc., purchased SmartStop Self Storage and demand from a new crop of investor (pension funds, endowments, and the like). Even overseas buyers found their way into a segment, which was never considered a core and arguable also a rather American asset class.

Self-storage was the big surprise during the Great Recession as it held up much better than most other asset classes. It since has gained an impressive amount of new followers, including investment banks with foreign money to spend.

What has also made this asset class more attractive than ever, especially in high-priced markets such as Southern California, are rising apartment rents coupled with a decrease in square footage. Therefore, those who are downsizing by necessity and giving up on closet space are searching for new places to store their surplus stuff.

In places like downtown Los Angeles, the average size of newly built apartments has declined 11 percent or by about 110 square feet over the past 15 years, according to CBRE research.

All these dynamics, combined with historically low interest rates and higher asset values, have compressed capitalization rates in the sector to record lows in the mid-fours from the more common sixes and sevens. Yet as financing markets are getting tighter and refinancing terms will no doubt get less favorable, the tides are changing. And while development came to a screeching halt after the last downturn, today new construction is on steroids, adding additional competing product short-term self-storage investors need to consider.

Hence, we are advising those with a three-to-five-year investment horizon to cash in before market conditions change and take advantage of private equity and long-term institutional investor demand. As consumer and investor confidence shrinks, cap rates will start to climb in lock-step with rising risk aversion. We say: Act now.

Nick Walker is senior vice president based at CBRE’s Ontario California office and specializes in the ever-growing self-storage industry throughout the United States.