GlobeSt.com -- These are good times for self-storage, MMI says in its new report on the sector. For starters, the sector will see a 50-basis point decline in vacancy nationwide this
year, driven by “a more robust pace of economic growth” that will also
fuel rent increase as high as 4.2% for climate controlled product.
Already in several markets, notably California’s major cities as well as
Atlanta, bp declines in vacancy last year were in the triple digits. The report notes that payrolls are
growing steadily. Meanwhile, real disposable income, “a broader measure
of spending power than wages that takes inflation into account,” is
rising. Accordingly, “purchases of consumer goods suitable for
stowing continue to climb, creating potential new requirements for
space in existing self-storage properties nationwide.”
Even as growing space demand appears to justify building new
facilities, “construction remains anemic,” according to MMI. There’s
fierce competition for development sites, “with multifamily builders in
the midst of a building boom that is pushing up land prices and shutting
out self-storage developers.” Permitting and entitlements for self-storage also pose a challenge,
especially as municipalities seek “more potent sources of fees and tax
revenue,” according to the report. “While limited now, construction will
eventually rise and exert greater pressure on property performance,
perhaps as soon as late 2016. Publicly-traded REITs in the self-storage sector also continue to
gain strength from positive space demand and rent trends, and have been
enjoying elevated returns and lofty stock prices over the past year.
“During earnings calls in early 2015, the REITs reported
strong results for 2014 and offered bright outlooks for 2015 operating
results." For example, Buffalo-based Sovran Self Storage, which operates
under the Uncle Bob’s brand name, “forecast full-year revenue growth
from 5% to 6% and cited its greater ability to push rents higher in most
of its markets.” REITs in early ’15 earnings calls also expressed a desire for
additional transactions, especially in infill locations with formidable
barriers to development. Yet MMI notes that sourcing transactions
involving large portfolios of newer high-quality properties, remains
challenging, partly reflecting the lack of new facilities coming on line
over the past few years.
While there were more sales of multiple assets in single transactions
last year, the total includes “only a handful of deals” that involved
more than 10 properties. Meanwhile, the one-off transaction market
remains in sound health following an increase in deal flow and
substantial jump in dollar volume in ’14. “A good portion of trades continue to occur in the $1-million to
$5-million price tranche, the domain of small single-property
owner-operators and many regional investors,” says MMI. “First-year
returns in this segment of the market typically range from 7% to 8% and
buyers are becoming more active as debt financing loosens. Conversely,
cap rates for REIT and institutional-caliber assets can drop below 6%
“due to intense competition for properties.” On the transaction front, steady flows of equity and debt
into the self-storage sphere, plus expectations of a near-term rise in
interest rates, are likely to support a volume increase throughout the
year. “Recent property performance improvements will place upward
pressure on valuations,’ notes MMI.
