The self-storage investment sales market continues its hot streak as it enters 2016. The sector produced another strong year of sales into 2015, and the momentum continues to build.
Real Capital Analytics reported a spike in sales in 2015 with an estimated $4.3 billion in total sales – a level that was nearly triple the $1.5 billion in sales the firm recorded in 2014. That number was inflated by the inclusion of some big mergers, notably the Extra Space Storage Inc. purchase of SmartStop Self Storage.
Other industry estimates put the volume of sales transactions quite a bit lower. According to NGKF Capital, self-storage property sales in 2015 were closer to $1.8 billion. The firm tracks sales valued at $5 million and above, while RCA tracks deals valued at $2.5 million and higher.
“There are quite a lot of buyers out there. So, it doesn’t feel like there is as much deal flow coming, but I think the deals just happen to be moving quicker and are being taken off the market in a shorter marketing timeframe,” said Nick Walker, a senior vice president at CBRE in Ontario, Calif.
Marketing times have gone down to three to four weeks on the market to get all of the offers that a seller would need, he added.
There is no question that a significant volume of properties has traded hands in the past five years, including some major portfolio sales priced between $200 million and $400 million.
For example, NGKF Capital Markets represented Storage Pros Management LLC in one of the largest industry sales of 2015. Storage Pros sold a 37-property portfolio to a joint venture led by an institutional investment firm for $242.5 million. The buyer closed on 30 of the properties in December with the remaining seven properties closing in first quarter 2016.
Despite the volume of properties that have already changed hands, there continues to be a healthy supply of for-sale properties expected to hit the market this year.
“We are busier this first quarter than any first quarter I can remember since 2010,” added Aaron Swerdlin, executive managing director at NGKF Capital Markets in Houston.
More deals, smaller size
NGKF is working on more deals that are smaller in size. However, the bigger deals tend to happen in the second half of the year. If that holds true, 2016 could potentially be as big as 2015, he said.
Yet some are questioning how much more for-sale inventory is waiting in the wings.
“The pipeline for the first half of the year remains really strong, and after that we’re not 100 percent sure what the second half of the year is going to look like,” said Michael A. Mele, a senior vice president and senior director of the National Self Storage Group for Marcus & Millichap.
“So much has been sold that I don’t know if we can keep up that pace, or if we are running out of sellers,” he added.
The lack of inventory could lead to a bit of a pullback in transaction volume. There have already been a number of large portfolio sales that have transacted.
“This year, I think you will see a few, but I don’t think they will get anywhere near as large,” said Walker.
For example, Walker is currently marketing a 22-property portfolio in California. That being said, there are plenty of good properties that are going to be coming to the marketplace, including some different opportunities with some certificate of occupancy deals. In addition, some owners that don’t have good succession plans may be looking to exit now when markets may be close to or at peak pricing, he said.
To keep the sales momentum going, buyers may have to expand their targets. Some of the institutional players are going into secondary markets, because they are not competing head-to-head with the REITs. Buying is expected to be very aggressive within the top 40 MSAs this year.
Investor demand is putting pressure on pricing and cap rates. At mid-year, sale prices averaged $76 per square foot, which is an 8 percent increase over the prior year. Cap rates for the same period declined 30 basis points to average 6.5 percent. However, institutional quality assets have seen pricing drop to the 5 to 6 percent range as of year-end, according to a second half 2015 self-storage research report released by Marcus & Millichap.
It is hard to judge the cap rate, because most of the institutional buyers are not buying on a trailing 12-month cap rate. They are buying looking ahead at year-one numbers. REITs, for example, are going to look at price per square foot, expenses and the rates that they get in that market and buying on anticipated performance, said Mele.
Even given those qualifiers, buyers are not likely to get much more aggressive on pricing than they are now. In addition, the cost of capital is not going down any less and buyers have been disciplined, which Mele said is keeping prices stable.
“It is getting harder to find the upside in these deals that was once there, because even the smaller guys are more and more successful lately,” Mele said.