Tradd Commercial has capitalized on this investor confidence in the Self Storage industry. Bruce Stankavage, Senior Advisor
and product specialist, has put together several notable deals within
the last 12 months to include a 1,200 unit project in Hope Mills, NC and
a portfolio transaction containing a total of 3,500 units in
Fayetteville, NC.
The
self-storage market continues to boost investors' confidence with robust
performance gains. 2013 was characterized by significant growth in
terms of occupancy and income while overall capitalization rates and
yields continue to compress. The U.S. economy concluded on solid ground
last year and this momentum is expected to continue to support
self-storage performance in 2014. Job growth helped reclaim jobs
eliminated during the recession. The employment growth has bolstered
consumers' confidence in the durability of our economy resulting in the
creation of additional households. These gains along with a rising
immigration should increase new households in 2014 to over a million
(which has not been achieved since the late 90s). This combination of
population mobility and household formation has increased demand for
self-storage units throughout the US, while construction of new
facilities has lagged and has shown only modest growth. As such,
optimism still prevails with the investor.
As
a result, operational metrics in the self-storage market remain stable
and owners / operators will capitalize on low vacancy rates to possibly
increase rental rates in 2014. The migration associated with the job
growth has been generating demand for self-storage units throughout the
Southeastern United States. Many of the newly employed are housed in
apartments thus creating demand for self-storage units. In addition, as
retirees sell their homes in the Northeast the demand for storage units
in destination cities to temporarily hold household items has
increased.
In 2014 and beyond,
investors will have to consider the expected rise in interest rates
against the current cap rates. The Federal Reserve has begun to tighten
their Quantitative Easing (QE) program and as a result a perception
shift in the capital markets has begun. Capitalization rates have not
been affected to date, but the expected rise in interest rates will put
upward pressure on returns. The lack of supply in the market along with
performance indicators has placed sellers in advantageous positions
(this has also kept capitalization rates in check). The tightening of
capitalization rates has led investors to focus their efforts on
secondary and tertiary markets where yields can range from 50 to 250
basis points higher than primary markets. While there is concern with
certain investors over capitalization rates, the ability to quickly
adjust rental rates diminishes inflationary concerns and keeps their
optimism high.
When capitalization
rates begin to increase, the spread between the primary and secondary
markets may decrease in conjunction with the Fed continuing its fiscal
tightening, interest rates upticks, and the continuing improvement in
the overall economy. This uncertainty in government fiscal and monetary
policy is somewhat offset by strength in the private economic sector.
The lack of a significant amount of new supply will provide strength to
the underlying fundamentals to include continued rental and occupancy
rate growth for this asset class. With that being said, market
investors view the future of interest rates as the driving factor that
will determine the sales volume and pricing for self storage assets.
