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SEATTLE-Occupancy levels at self-storage properties are declining, according to the 2010 Self Storage Outlook from the National Self Storage Group at Marcus & Millichap. The report says it may take two or more quarters to determine whether aggressive leasing incentives and rent reductions currently being offered will be sufficient to jump-start tenant demand.

The report attributes the decline in occupancy to efforts by the usual customer base to avoid unnecessary expenditures in the face of job losses and falling home values. Counter efforts by self-storage property owners to mitigate occupancy decreases by cutting rents have resulted in revenue decreases.

According to the report, newer assets built during the market peak in once high-growth areas are suffering the most from weak demand, with some markets operating at occupancy levels in the low-70% range, 100 basis points below the national average. On the other hand, Marcus & Millichap says properties in close-in commercial and residential areas are expected to perform better in the short term, benefiting from more stable housing conditions and small businesses seeking additional space for expansion when the recovery gets under way.

The report predicts transaction velocity will stay constrained in coming months, as investors continue their wait-and-see approach. Investment activity that does occur will center on smaller, stabilized assets in strong locations, with properties under $3 million that have positive cash flow and local financing available garnering the most interest.

Though Marcus & Millichap says cap rates are difficult to discern due to limited activity, it estimates the current average in the 8% range for Class A properties and 9% and above for Class B properties. The report says initial yields in both classes have risen about 25 basis points to 50 basis points over the last six months. Cap rates will continue to rise into 2010 as buyers underwrite for higher vacancy rates and increased concessions.

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