Markets On The Move: Northern California

Our firm focuses exclusively on self-storage sales throughout the West and Southwest. The majority of our business is conducted in Northern California, mostly from Redding south to Bakersfield and running east to the greater Reno area.

In taking a look at the sales activity and acquisitions that have been made in the region, we should first consider the drivers which have been responsible for the rampant run-up in values. To a certain extent, all markets are hot or “hotter” when certain underlying conditions exist.

First, historically low interest rates have created a tremendous downward pressure on capitalization rates, thus increasing values across all markets. What used to be a seven percent CAP five years ago is now a five percent CAP rate, and even those properties located in secondary and tertiary markets have seen incremental decreases in CAP rate, which equates to higher values. The rising tide has indeed lifted all ships.

Furthermore, low interest rates have also contributed to higher values in that attractive financing is available and induces many people to buy. Investors are receiving less than two percent on their savings and would much rather have their money leveraged and working for them in a cash-flowing investment. Seemingly there is a cost associated with doing nothing, so many scramble to place equity into real estate, banking on appreciation, arbitrage, and positive cash-flow. More self-storage investors are in the market, thus with a fixed supply and increasing demand, values have increased. One may say, “But the Fed has increased rates, surely this market trend of low interest rates and low CAP rates has come to an end.” This may be a false assumption. What I have witnessed in the marketplace since the Fed last increased their benchmark rate is an increase in activity. Most investors perceive the rate increase as a signal that the low interest rate environment is fleeting and they are bustling to obtain commitments before rates increase any further. It’s become a high-stakes version of musical chairs, and the individual investor does not want to be left holding their cash with no property or loan in tow. Many larger, institutional investors that I have spoken with actually favor a higher interest rate environment as they hope that it will normalize the market and drive some of the smaller investors out. Private equity has been on a tear as of late, and the institutional investor would like nothing more than for rates to increase which would decrease yields and make some of the more aggressive acquisition models less sustainable.

Finally, many of the drivers of supply are prevalent in the marketplace. The underlying macro-level economics all support the case for increased supply. Higher occupancies have led to rent growth at most facilities. This, in turn, has led to increased NOIs and corresponding values. Additionally, when developers see high occupancies with potential for rent growth they are more apt to develop. The multifamily market segment is strong as well. Renters are frequently storage customers as they have limited storage space. Job growth and consumer confidence are increasing, which lead many people to purchase goods that will ultimately need to be stored.

Several new storage facilities are being developed in the south Bay Area. These new properties will test the limits of absorption as Silicon Valley continues to fuel a voracious appetite for storage. Sales velocity continues to increase, nearly doubling since last year. Looking forward, 2016 should continue to be a banner value for owners. Stable interest rates should lead to stabilized pricing and buyers will have opportunities to make purchases that make more intuitive sense from a return standpoint.

Bobby Loeffler is president of The Loeffler Self-Storage Group, Inc. based in El Dorado Hills, California.