any new class A listing, which will
prompt most investors to
pay cash to stave off the competition,
CALABASAS, CA-Demand for self-storage space will be sustained by an improving job market and the daunting effects of Hurricane Sandy, GlobeSt.com has exclusively learned from Marcus & Millichap Real Estate Investment Services. The catastrophic events unfolding from the hurricane created an estimated $20 billion to $30 billion in damage along the Eastern Seaboard and according to the firm, typically after a natural disaster of this magnitude, “demand for self-storage accelerates as homeowners store undamaged goods during the cleanup process, while contractors and local suppliers utilize commercial space.” As such, the firm says that operators with heavy exposure to the East Coast will see a sharp increase in business over the next six to 18 months.
On a more positive note, according to Michael Hoffman, first vice president and national director of the firm’s national self-storage group, “with the economy on the mend, the nation has gained 1.3 million jobs this year, which enhanced consumer confidence to a four-year high and boosted retail sales.” He adds that “This trend will persist through the holiday season as an additional 400,000 jobs will be created in the final quarter.”
Hoffman adds that technology-driven markets, including the Bay Area, Seattle, Los Angeles, New York City, and Boston, along with oil-rich regions in Texas and North Dakota, will realize a significant portion of these gains. “As residents relocate to these areas, many will enter the rental community and utilize storage units for excess items,” he says. “This rise in demand, coupled with limited construction will support positive absorption across the nation this year.”
In order to satisfy investment objectives and grow portfolios, buyers needs to place liquidity into top-quality properties located in primary markets, says Marcus & Millichap. “Bidding will remain competitive for any new class A listing, which will prompt most investors to pay cash to stave off the competition,” says Hoffman. “With cap rates for these properties already treading near the sub-7 percent range, buyers looking to maximize returns may target stabilized assets in one-off markets, which can generate up to a 150-basis point premium. Meanwhile, smaller, local and regional investors priced out of the top-tier sector, will purchase class B/C assets with proven cash flows in secondary and tertiary markets. Qualified buyers with a solid operating history may be able to utilize the SBA 504 loan program for the acquisition.” Due to the attractive debt being offered, investors who use leverage could realize a cap rate spread of up to 400 basis points, says Hoffman.
Marcus & Millichap’s 2012 Self-Storage Outlook by Region
East: As job growth persists in the most of the Eastern region, demand for self-storage space will remain robust, while limited new construction will support positive net absorption this year. As a result, occupancy in the region will surge 350 basis points in 2012 to 85%, which will bolster asking rents 5% to $1.02 per square foot.
Midwest: The manufacturing industry will once again help sustain demand for commercial and residential self-storage units in the coming months. For the year, occupancy will trend up 140 basis points to 86%, representing the highest level since 2008. In response to the intense demand, landlords will enhance asking rents 3.1% this year to $0.77 per square foot.
South: Fostered by firm demand in the Texas markets, occupancy in the Southern region will soar 250 basis points to a four-year high of 83.4%. As a result, operators will increase asking rents 2.1% during 2012 to $0.81 per square foot.
West: Elevated net in-migration supported by healthy job growth across the West will boost demand for self-storage space as households that relocate to new markets downsize into apartments, using storage for excess items. Occupancy will finish 2012 at 83.2%, marking a 210-basis point improvement from 2011. Asking rents, however, will fall 3.4% to $1.04 per square foot.
Drilling Down to the West Trends:
Occupancy: After occupancy declined by an average of 350 basis points in Phoenix, Las Vegas, and Salt Lake City during the past year, occupancy in the subregion dropped 170 basis points to 84.7%. Year to date, though, occupancy rose 190 basis points across the Mountain subregion.
Rents: Although demand slowed, asking rents escalated 5.8% on a year-to-year basis to $0.91 per square foot. Rents in the Denver-Aurora metro surged 10% from a year earlier to $1.10 per square foot, marking a record high.
Occupancy: Year to date, occupancy in the Pacific subregion soared 460 basis points to 84.9%, buoyed by significant improvements in the San Jose, Seattle-Tacoma, and San Francisco metros.
Rents: Asking rents rose in step with occupancy, growing 3.4% in the last three quarters to $1.22 per square foot. The Portland-Vancouver metro boasted year-to-date rent growth of 10%, while rents in Los Angeles rose 3.7%.
West Sales Trends
Cap Rates: As sales velocity in the Western region accelerated by 66% in the past year, initial yields compressed 30 basis points to the high-7% range.
Prices: The median price was unaffected by the robust demand, staying flat from a year ago at $56 per square foot. Older assets in tertiary markets sold below $30 per square foot, while class A products traded above $120 per square foot.