Have the troubling headlines in the media negatively affected the self storage investment markets? Once the step-child of the real estate industry, self storage is quickly becoming one of the most desirable real estate investment product types from the beginning to the experienced investor. As a result, the increased interest has resulted in a flurry of development activity that has heightened the competitive landscape in certain markets. Now that the secret is out, can self storage sustain its luster compared to other sectors of commercial real estate?
Self storage has always been set apart from other investments because the business model has relied more on cash flow than other sectors. Many industry experts agree that investors in other sectors rely more on appreciation, where self storage tends to focus on the cash on cash returns in current and future years. This is what differentiates it from all other asset classes.
However, self storage hasn't been immune to the overall slowdown in the market in recent months, but other experts feel as if the slowdown has peaked, and that we are beginning to see an upturn in overall transaction volume for the sale and purchase of existing facilities. We aren't at the volume we were a year ago, but the activity clearly shows that the market is trending upwards.
As we look forward to 2008, location of new sites will play a major role. Those in the Midwest, South or West, will experience different dynamics that will affect the market. But overall, the self storage outlook is stable in some markets, positive in others, and somewhat soft in areas that experienced overbuilding.
Regardless of the number of deals being done, the self storage investment market has definitely been impacted by rising cap rates that have subsequently reduced values. However, investor interest still remains strong and new players and opportunity seekers continue to enter the market with a strong appetite for value plays.
One of the biggest effects on the overall investment activity is the recent fluctuation in the capital markets. There are many deals out there that are just waiting to be done until there is more stability with interest rates and pricing models. self storage is fine, but uncertainty has caused some investors to take a more “wait and see” approach before they consider any investment in commercial real estate. It has become difficult in the past couple of months for anyone to have an accurate forecast, and that has caused a slow down in investment activity.
Ultimately, a solid facility in a great location with a great track record will remain a desirable target for investors, even with the uncertainties in the capital markets. Those investors in strong markets that have well-managed facilities that provide ample cash flow shouldn't feel any substantial impact, and will still provide an opportunity for the investor looking for a solid deal. Self storage still continues to have the lowest loan default rate in the commercial financing markets compared to all other real estate product types, and because of that, demand will remain strong. In addition, self storage is not affected by the cyclical nature of economic factors compared to other product types.
The Effect of Apartments
While the downturn in new home construction is hurting facilities in some areas, changes in the housing market may benefit storage in the coming year. Typically, self storage does well when the multifamily markets are doing well, and predictions in that segment point to a strong year with some much anticipated absorption. Many in the multi-family brokerage community predict that of all the real estate sectors, multifamily properties are posed to see the highest level of appreciation in the coming year due to the subprime fallout in the single-family residential markets.
Unfortunately, as more and more people are being forced into foreclosure on their homes, they turn into renters, which will boost occupancies in multifamily properties. This boost in occupancies will allow apartment owners the ability to raise rents and subsequently, the valuations of apartments will experience an increase this year.
Another reason for growth in the apartment market is that the “echo boomers” are coming of age and becoming renters. That trend is now beginning and should rise for the next ten years. The presence of this trend proves the need for storage owners to begin targeting younger customers by marketing to college students and by implementing technology to serve this tech-savvy generation.
Although self storage facilities store goods for their customers rather than people, in many ways, self storage facilities are similar to apartment complexes, but with some unique advantages. Both apartments and self storage cacilities rent space for around $1 per square foot, but, self storage occupancies have traditionally been in the 90 percent range which has not been true for apartment buildings over the course of time. In addition, in the apartment industry, when you experience a vacancy, you have to paint, carpet, and repair appliances. You also experience roof issues, management of tenants, and toilets that leak and cause problems. None of this is present with self storage.
One key demographic trend affecting virtually every real estate sector is the surge in retiring baby boomers and the subsequent migration of the U.S. population to the Sun Belt states. Approximately 77 million baby boomers will retire over the next two decades. Self storage stands to benefit because when people move, they store stuff. When they downsize, they store stuff.
It appears that self storage will continue to hold its own against the other major real estate product types from an investment standpoint. And if history continues to repeat itself, self storage will continue to outperform every one of the commercial real estate sectors. It's not inflation-proof, but it's insulated from economic fluctuations like no other sector.
Properties continue to hold their own and perform even in mediocre markets, and shine in hot markets. They also benefit from and do well in markets that are losing in demographics and in markets that are growing. As a whole, the industry has more flexibility in performance than almost all other real estate investment property types. It is for this reason that self storage will continue to deliver stellar returns to investors in the long run!