Real Estate Market Update 2016: Self-Storage Price Per Square Foot Tops $100
Bill Alter, Rein & Grossoehme
AZSA Board Member
With 22 sales through the end of November, sales velocity in Arizona has dropped significantly this year. It is at its lowest since 2012, when there were 14 sales. The big news this year is the average price per square foot, which topped three digits for the first time, at $100.29.
Cap rates appear to be continuing their downward compression, moving from an average of 5.95% in 2015 to 5.64% this year. Average cap rate since 2006 are shown in xx the table. Note that a correct understanding of the cap rates cited for each year requires an underwriting formula that includes each year’s occupancy percentage and aggregate operating expense amount.
Cap Rates |
|||||
|
Year |
Number of Sales |
Average |
Average |
Average |
Average |
|
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 |
|
2016 |
22 |
72% |
$245,000 |
5.64% |
$100.29 |
Not surprisingly, when you look at the numbers behind the numbers, there continue to be two distinct markets for storage investment: the Class A newly-constructed properties; 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 newly-constructed properties can achieve sub-5.5% cap rates and prices per foot above $150. The older, non-institutional quality assets are trading at 6% caps and prices per foot in a very broad range from approximately $30 to $80. The major determining factor of price per foot is the level of market rents in each specific property’s own sub-market location.
Sales volume next year will depend on interest rates and development. There is no doubt that self-storage development is very popular, but some of the underlying fundamentals supporting new construction may be softening. In fact, at least 20 new projects either opened this year or will open early next year. These projects will add over 1.5 million square feet to our current supply of almost 20 million square feet. This new construction will satisfy the storage needs of 3.5 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 21 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