Self-Storage Investor Survey
By Kate Spencer and Greg Wells
The survey data was collected as part of an online questionnaire that was sent to key self-storage market participants during a two-week period at the end of December 2017. The market participants were asked to segregate their responses by investment class (A, B, and C). Furthermore, the data collected is corroborated by the experience and knowledge of the 20 Self-Storage Industry Group team members at Cushman & Wakefield.
Cushman & Wakefield defines the investment classes as follows:
| Table 1 – Self-Storage Investment Classes |
|---|
| CLASS A • Located in a Top 50 MSA • Market has high barriers to entry (through either lack of developable land or a lengthy entitlement process) • Generally newer facilities in good condition with state-of-the-art amenities including climate-controlled units and secured facilities with gated access • Professional on-site and off-site management • Minimum size of approximately 75,000 square feet • Good location with access to attract tenants willing to pay rents in the upper percentile in the market place CLASS B • Located in a Top 100 MSA • Market has typical barriers to entry • Generally facilities built since 1980 in average to good condition with amenities typical for its market including secured facilities with gated access • Full-time on-site and off-site management • Minimum size of approximately 40,000 square feet CLASS C • Either located in a smaller market or in less desirable areas of a Top 50 MSA • Generally 1970s or 1980s vintage properties in average to below-average condition • Generally managed by the owner and may not have an on-site manager • May or may not have typical amenities such as gated access, security cameras, and/or climate-controlled units |
Market Trends
- Capitalization rates have stabilized and could increase slightly within the next 12 months due to the increase in interest rates. As expected, the spread between each of the three classes range between approximately 50 and 100 basis points. The rates from our Q2 2017 survey corroborate this conclusion, as the rates are slightly higher in most categories.
- While there are concerns about new supply and changing cap rates, there continues to be a significant amount of capital that is still looking to be placed in the sector. Historical high returns from the self storage REITs continues to attract new market participants.
- Smaller portfolio transactions, particularly in the Class-A and B+ product, have slowed due to the lack of availability. Interest in Class-B and Class-C portfolios continues as investors are looking to place capital.
- Buyers continue to recognize the risk of new supply entering the market and are more conservative in their underwriting where there is significant potential for
new supply. - Additionally, increases in real estate taxes, particularly after a sale, are requiring owners to manage the assessment and appeal process to ensure fair and reasonable taxes.
- In trade areas experiencing new supply, operators report that actual and market rents have decreased to maintain physical occupancy.
- Due to the influx of new supply, the REITs lowered their growth projections in 2017 and have maintained similar projections for 2018. While the growth forecast has been tempered, self-storage REITs are still projecting returns that are amongst the strongest of all the asset types.
- REITs have shifted their focus from acquisitions to joint ventures and third-party management platforms due to concerns of new supply and increasing development costs.
Development Trends
- A number of cities have issued a moratorium on self-storage development to curb increases in self-storage supply. Other cities have required onerous steps within the development process or required special use permits (most notably, New York City, which now requires a special use permit to develop within the IBZ).
- In some new projects, physical absorption can be fast (12 months); however, economic absorption remains between 24 and 36 months for most projects.
- A major topic of market industry participants continues to be new supply, which is expected to crest in 2018. While there is not a single source of reliable development data, markets such as Dallas, Charlotte, Denver, and Austin are consistently discussed as being markets with a high amount of new supply in the pipeline. Markets such as Los Angeles, San Francisco, and New York are still viewed as favorable development markets due to the high barriers to entry and population density. However, because self-storage remains a trade area specific business, it is difficult to quantify any large MSA as being over-supplied.
Conclusion
The second half of 2017 was fairly stable as the industry was waiting to understand the implications of the effects of the new supply. The influx of new supply may impact rental rates and occupancy rates in certain markets; however, this is widely viewed as being short term in nature. Self-storage portfolios are still in demand, as market participants are looking to add to their existing footprints, and new investors are looking to enter the space. We expect the market to remain cautiously optimistic in 2018.
Table 2 – Cushman & Wakefield Self Storage Investor Survey Fourth Quarter 2017
| Class A | Class B | Class C | |
| Going-In Capitalization Rate | |||
| Average Low | 4.87% | 5.54% | 6.43% |
| Average High | 6.00% | 6.83% | 8.12% |
| Average Overall | 5.43% | 6.18% | 7.28% |
| Terminal Capitalization Rate | |||
| Average Low | 5.54% | 6.55% | 7.00% |
| Average High | 6.41% | 8.00% | 8.31% |
| Average Overall | 5.67% | 6.50% | 7.50% |
| Discount Rate | |||
| Average Low | 7.00% | 7.75% | 8.25% |
| Average High | 9.00% | 10.00% | 10.00% |
| Average Overall | 8.35% | 9.07% | 9.88% |
| Average Marketing Time (months) | 1.91 | 2.41 | 3.63 |
| Average Rent Growth | 4.42% | 4.00% | 3.41% |
| Average Expense Growth | 2.65% | 2.63% | 2.81% |
| Source: Cushman & Wakefield Valuation & Advisory Self Storage Practice Group |
Kate Spencer, MAI, is managing director/practice group leader, Self-Storage Valuation & Advisory at Cushman & Wakefield. Greg Wells is senior director,Self Storage Practice Group, Brokerage Services at Cushman & Wakefield.