Category Archives: Defy’s Experts

Investors…Consider The Uncomplicated Self-Storage

 Issue 85 – Uncomplicated Self-Storage

Introduction...The uncomplicated world of self-storage recently became the most desirable way to invest in commercial real estate.

Two examples...

  1. One Fort Worth owner had is property 95% leased when a buyer came along and asked if he’d sell.  The owner estimated his property value to be $4,000,000.  When the offer arrived at $5,500,000 the owner said, “SOLD!”
  2. Another owner had accumulated 20 smaller properties in Texas and New Mexico. He was very happy with the management and the cash flow.  Until a California investor wanted to jump into the market and offered $25,000,000.  Again, this owner “SOLD!”

Why so much interest in self-storage…In the past apartments were considered the most desired way to invest in real estate.  However, there are many good reasons to branch out.

Self-storage has proven to be recession proof.  During boom times we buy more stuff to store.  During contraction when we are downsizing, we tend to store our extra stuff rather than sell it.

In a recent issue of the Self-Storage Insider, we reported…The Commercial Mortgage Backed Securities (CMBS) self-storage loans funded over the past 10 years have the lowest default rate of all property types at less than 1 percent.

In conclusion…Do you have self-storage in your portfolio?  If not, let us give you more insider information by contacting us at bill@billmoist.net.

Self-Storage’s Appeal Defy Experts

Self-Storage w Brick

Self-storage assets lack the architectural themes and fine details that produce trophy properties in the office and retail sectors. No gleaming lobbies or guest amenities like the hotel sector. Yet investors have recognized other virtues in the self-storage asset class and driven capitalization rates (the annual return on the purchase price) down by 2.75 percent in recent years, a pace of almost .05 percent per quarter, according to a recent assessment from real estate services firm CBRE.

Now however, capitalization rate compression in the sector is slowing down. After the close of the first quarter of 2016, the average cap rate on transactions was 5.70 percent, a change of .04 percent. True enough, the drop in capitalization rates has slowed, but rates are still moving in a direction that is benefitting investors and owners.

“People love storage,” says Chris Sonne, executive vice president and national self-storage valuation group leader in CBRE’s valuation and advisory services division. “While there wasn’t a lot of activity in any sector in terms of transaction volume, when you compare that to declines in other asset classes, like office, self-storage was impacted the least.”

Strongest Annual ROI...Self-storage has the strongest average annual ROI performance, around 18.0 percent, of any equity REIT sector between 1994 and 2014, according to NAREIT.

Trade areas for self-storage units are about three miles, according to Sonne. In 2010, analysts took note of the revenue models for the properties, and noted an unexpected and stunning benefit. If, for instance, a self-storage property has 500 units, the owner of that facility might raise rents by $5 in a lease’s fifth month. Tenants do continue to pay. In month 10, the rent might go up another $5 or even $10, and tenants still continue to make payments on the unit.

“You can raise rents without losing occupancy,” Sonne says.

In conclusion…“The sector is as close to a recession-resistant property class as there is,” says Arlen Nordhagen, CEO of National Storage Affiliates Trust, a Greenwood, Village, Colo.-based REIT. This advantage over other asset classes and the low management requirement has contributed to the massive influx of capital into self-storage acquisitions and development.

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Posted by: Bill Moist, MS, CPA, Self-Storage Buyer