by C. William Barnhill, CCIM, and Ben Vestal
Despite the difficult economy and market challenges during the past four years, self-storage as an asset class has continued to provide solid performance and stable returns for investors. Once dominated by mom and pops, or small, independent owner/operators, the self-storage industry has evolved into a top-performing asset class during the past decade.
Though once barely on the radars of major investors, self-storage has taken off among institutional-level investors in recent years. Since 2010, real estate investment trusts have demonstrated an almost insatiable appetite for properties larger than 45,000 net rentable square feet in the top 25 metropolitan statistical areas. In 2011, self-storage REITs boasted a handsome return of 35.4% -- the strongest of any REIT -- for the second consecutive year, according to the National Association of Real Estate Investment Trusts.
Despite the changes in the self-storage industry, approximately 83% of these properties nationwide remain in the hands of small, independent investors, according to the 2012 Self-Storage Almanac. Most sellers today are not disposing of their assets to capitalize on the improving market. Rather, sellers are often driven by life events that motivate them to sell at a reasonable price.
With affordable capital available through debt and equity providers, small investors are starting to take advantage of self-storage investment opportunities in secondary markets. The nearly historical high spreads between capitalization rates and interest rates in secondary markets have allowed small investors to generate very compelling cash-on-cash returns.
Self-storage has managed to maintain stable occupancies throughout the economic downturn. At year-end 2012, only 4% of self-storage commercial mortgage-backed securities loans were in delinquent status -- the lowest delinquency rate among all major commercial real estate asset classes, according to Trepp data. With cap rates hovering around 7% nationwide, self-storage is in line with other core real estate asset classes, according to the PwC Real Estate Investor Survey, 2Q 2012.
However, the growing institutional buyer focus on properties in the top 25 MSAs has led to overall cap rate compression in these markets. The cost of capital for institutional buyers ranges from 100 to 300 basis points less than the cap rate yield, thus providing a positive return on equity for a leveraged transaction. The availability of capital through CMBS, banks, and life insurance companies provides good debt options with very aggressive terms.(CCIM) Self-Storage Steps