SAN DIEGO—Land, self-storage and multifamily are three asset classes poised for growth, said panelists at REISA’s Spring Symposium here earlier this week. According to moderator Derek Peterson of Walton International, while seemingly unrelated, the three categories derive their growth from the same source: population growth.
Peterson pointed out that US population is expected to reach 400 million by the year 2050, a growth of 3 million people per year. Housing starts are projected to hit more than 1 million this year, a number that has been rising over the past few years. Participating in that growth is the key to understanding which markets will thrive in the near future.
Peterson said his firm is involved in the beginning phase of that growth: the land. He added that there are five phases to that pattern: raw land, concept planning, horizontal development, vertical development and developed real estate.
David Kelsey of Hamilton Point Investments said the multifamily sector has seen multiple quarters of effective rent growth, and the sector is looking strong. “We have seen an increase in values of multifamily properties and have succeeded where we were at the peak, but that belies the secondary and tertiary markets. We look carefully at individual markets and deals themselves and have a cherry-picker approach.”
Values have risen in multifamily to the point where Bill Lehew of Hines Securities said his firm finds development in his markets more cost-effective than acquiring. “We’re also looking at macro trends. Gen Y tends not to think like my generation. For them, owning a home is not their top priority, and they will continue to focus on renting.”
Kelsey said the biggest risks in multifamily are new supply coming in, threatening occupancy and rental growth, and Lehew added that his firm times new product coming online so as not to align with new product from competition.
Meanwhile, the self-storage market is “drafting off the success of multifamily,” according to H. Michael Schwartz of Strategic Storage Holdings. “We’ve been buying self-storage every year since 2005 and have seen traditional cap-rate compression, but also development opportunities. The lease-up opportunities from 2008-2011 are gone. We are now in a five-year phase of development.”
Schwartz adds that his firm is looking for retail locations in which to develop self-storage properties, and it looks at a 3- to 5-mile band to determine who its competition is. “We make sure we understand the market—what are people looking for in each market? What size unit? What features?”
The panelists also said the time is right for direct investing over REIT investing. “We’re not subject to the vagaries of the market the way a publicly traded vehicle would be,” said Lehew.
Schwartz added, “Public self-storage REITs are not developing, and this creates a nice alternative for investors in self-storage.” Peterson also pointed out that there are tax efficiencies in direct placements that can attract private high-net-worth individual investors.