Investors who buy self-storage properties are being more careful about which assets to bet on, but they continue to be willing to pay top dollar for these properties.
“The buyers are getting much more selective… there has been a lot of continued concern about supply,” says Brandon Karr, first vice president and director of the national self-storage group in the Fort Worth, Texas office of brokerage firm Marcus & Millichap.
Investors are worried about the number of new self-storage properties opening across the country.
To avoid competition from new properties coming on-line, many buyers have turned their attention to secondary markets, where fewer new self-storage facilities have opened. Meanwhile, buyers in overbuilt markets are taking more time to underwrite their deals, double-checking assumptions about future leasing and rent growth.
Cap rates creep lower
Despite these worries, self-storage investors keep paying higher and higher prices for properties relative to income. Cap rates in the sector are at their lowest point on record.
“Cap rates remain at historical lows for cash-flowing and stabilized opportunities,” says Brian Somoza, managing director in the capital markets group of real estate services firm JLL.
Average cap rates inched lower in 2018, creeping closer to 6.0 percent, according to a preliminary estimate from Marcus & Millichap. Cap rates have crept downwards for several years, falling from just over 7.0 percent in 2012.
They continue to trend lower even though interest rates have begun to rise, including the benchmark yield on Treasury bonds. “Compared with the U.S. 10-year Treasury, the national average self-storage cap rate is more than 350 basis points higher. During the height of the previous growth cycle that spread was just 250 basis points,” says Karr.
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Bendix Anderson | Mar 11, 2019