Real Estate Market Update 2015: Self-Storage Transactions Strong
By Bill Alter, Rein & Grossoehme
AZSA Board Member
With 36 sales through the end of November, sales velocity in Arizona continues to be strong. In fact, the number of closed transactions that took place in the past three years exceeds the number sold in the preceding seven years combined. Note, however, that this year’s numbers include the 12-property Security Plus portfolio. This activity paints a picture of a very strong market, raising the question in my mind at least, “How much longer can this go on?”
As shown on the table below, cap rates appear to be continuing their downward compression, moving from an average of 6.47% in 2014 to 5.95% in 2015. The cost per foot of sold properties verifies this growth in value, with an average of $63.75 in 2014 increasing to $72.96 in 2015. Note that a correct understanding of the cap rates cited for each year in this table requires an underwriting formula that includes each year’s respective occupancy percentage and aggregate operating expense amount.
Cap Rates |
|||||
|
Year |
Number of Sales |
Average |
Average |
Average |
Average |
|
2005 |
8 |
80% |
$123,000 |
8.25% |
$44.48 |
|
2006 |
19 |
78% |
$131,500 |
8.10% |
$62.62 |
|
2007 |
9 |
77% |
$139,000 |
8.00% |
$65.18 |
|
2008 |
4 |
75% |
$145,000 |
7.90% |
$48.88 |
|
2009 |
5 |
71% |
$138,000 |
7.20% |
$49.64 |
|
2010 |
7 |
73% |
$151,000 |
6.80% |
$52.52 |
|
2011 |
9 |
77% |
$146,200 |
7.00% |
$36.54 |
|
2012 |
14 |
65% |
$160,800 |
7.15% |
$43.65 |
|
2013 |
24 |
60% |
$204,600 |
6.06% |
$59.81 |
|
2014 |
32 |
64% |
$138,000 |
6.47% |
$63.75 |
|
2015 |
36 |
68% |
$170,000 |
5.95% |
$72.96 |
Not surprisingly, when you look at the numbers behind the numbers, there continues to be two distinct markets for storage investment: the Class A and B+ market; and the older, lower-quality assets that are of less interest to REITS and other institutional owners. If appropriately underwritten and effectively marketed, Class A properties can achieve sub-5.5% cap rates and prices per foot in the area of $150. The older, non-institutional quality assets are trading at 6% caps and prices per foot in a very broad range from $30 to approximately $80. The major determining factor of price per foot is the level of market rents in each specific property’s own sub-market.
To look into the crystal ball and predict what conditions might be in the next two years, it is important to know what is in the development pipeline. There is no doubt that self-storage development is also extremely hot. In fact, at least 35 new projects either opened last year or will open early this year in Arizona. These projects will add over 2.5 million square feet to our current supply of almost 18 million square feet, a 15% increase, adequate to satisfy the storage needs of about 3 million people. Is that much really needed? Or might this indicate the start of another over-built market in Arizona’s long history of dramatic real estate cycles? One of the lessons I have learned in my 30-year career in self-storage sales is that real estate is cyclical. You can count on the fact that the market conditions you operate in today will certainly change.
Bill Alter has been an Associate Member and member of AZSA’s Board of Directors for 20 years. He is managing director of the self-storage specialty group at Rein & Grossoehme Commercial Real Estate. You can reach Bill at 602-315-0771 or Bill@RGcre.com.
Source: Behind Closed Doors, AZSA Newsletter Archives