Strong fundamentals in self storage are resulting in rising income and occupancy, while new supply remains manageable, resulting in continued investor confidence in the sector, according to a new Self Storage Investor Survey released by CBRE’s Valuation & Advisory Services.
Financial operations continue to gain as investor interest continues a five year trend in cap rate and yield compression in the self storage sector, according to the survey, which reflects the knowledge and collaboration of Valuation and Advisory professionals as well as interviews with investors, brokers, owners, lenders and industry leaders.
Average self storage cap rates peaked in 2009 at 8.55 percent, indicating a decline to the average cap rate of 5.74 percent of 281 basis points (bps)suggesting an average compression rate of 4.68 pbs per month over the last five years, according to CBRE.
“Based on acquisition activity and comparative spreads in cap rates to 10-year Treasuries, investor confidence in the sector remains high,” said R. Christian Sonne, CRE, MAI, FRICS , Executive Vice President and National Self Storage Valuation Group Leader at CBRE.
The survey includes a breakdown among sector investment classes based on factors including construction cost class as defined in Marshall Valuation Cost Services. Investment Classes are identified by CBRE as follows:
Class A is generally located in a top 50 MSA (urban to suburban) and has an NOI/SF of at least $10. Markets are under-supplied to equilibrium with high barriers to entry. Construction quality is high with state of the art security features. Projects are generally less than 15 years old and contain at least 75,000 rentable square feet.
Class B can be located in the top 200 MSAs (suburban) and have an NOI/SF in a range of $6 – $10. Markets are generally in equilibrium to slight over-supply with some risk of new construction. Construction quality is good with most security features.
Projects are well-maintained, but may be 15 – 25 years old and generally contain 50,000 to 75,000 rentable square feet.
Class C product often has a rural location with low barriers to entry (lots of land, less challenges to zoning and entitlements). They generally have an NOI/SF of less than $6.
Markets are often over-supplied and rarely do class C facilities have occupancy higher than 85%. Facilities are generally 25 years old or older and may require capital expenditures for deferred maintenance. Projects are typically smaller than 50,000 square feet of rentable area.
According to the survey, cap rate compression continues, but is only down 16 bps from 4Q14 to 4Q15, the smallest gain in recent years and about half the pace of the prior year.
However, Class A facilities in top 50 MSA’s can trade with a cap rate in the low 5s, or even below in major metros.
Spreads over the 10-year U.S. Treasury Rate decreased slightly to 347 bps, below the 15 year sector average of 410 bps.
However, the spread remains higher than the 2006 low of 254 bps suggesting compression can continue, although declines are likely to remain small. It also indicates greater market discipline than in the previous boom cycle.
Transaction volume was record setting last year, with nearly 1,000 single asset sales.
Last year also had the third largest portfolio transaction in the self storage asset class history.
Buyers are considering secondary markets, but generally within the top 100 MSAs. Portfolio transaction volume has increased more for Class B and C product than in prior years.
Continued strong returns in cash flow, combined with restrained new construction trends, has led investors to continue to have high confidence in the sector.
Supply and demand market fundamentals remain strong in self storage, resulting in continued, robust growth in operating results.
In terms of industry performance, year-over-year results for storage REITs show increases of 6% to 10% in rental income and net operating income. According to the CBRE forecast, approximately 300 new facilities were constructed last year with 600 new starts forecast for 2016.