Even after a long bull run in the self-storage investment sales market, the sector is continuing to attract new capital to the space that is helping provide a steady pipeline of activity.

“Deal flow this year has been very strong with no real slow down thus far,” says James Ashley Compton, MBA, national director of the Self Storage Group for Colliers International in Nashville. Compton and his team expect to close between 40 and 45 property sales this year, which is almost double the volume of 2017.  In particular, low occupancy or certificate of occupancy (C/O) deals have continued to be very active in Nashville.

According to data from Real Capital Analytics, year-to-date sales are up slightly over 2017 at $3.34 billion through September. One of the biggest deals of the year is the acquisition of Simply Self Storage facilities for a reported $1.3 billion earlier this summer. Heitman Capital Management formed a JV partnership with National Storage Affiliates Trust to acquire the 112 Simply Self Storage assets. That single deal has elevated the sales volume, but overall it continues to be an active sales market, notes Ryan N. Clark, director of Investment Sales at SkyView Advisors.

New buyers step up

Notably, new money entering the market is coming from private equity funds and individual investors looking to buy self-storage assets as part of a 1031 tax deferred exchange. Some buyers have become more conservative and more selective in their acquisitions.

“I think that has opened the door for new groups to acquire without having to compete with some of the longer-standing, REIT type buyers in the market,” says Clark.

Some buyers are gravitating towards more established properties that have an operating history, yet they are willing to take on properties with some upside in terms of a value-add component.

“There is more caution in the air now than there was 12 to 18 months  ago with regards to lease-up, early stage deals and C/O deals,” says Clark.

That is partly a reflection of the new funds that have entered the market that are not structured to take on the cost of lease-up, he adds.

If the cap fits…

Cap rates on self-storage properties have been holding relatively steady over the past three years, while growth in sale prices has been slowing. According to the Green Street CPPI Index for September, pricing for self-storage properties have increased 3% over the past 12 months. Although that is still better than the all property average of 2%, it is a marked decline compared to past performance and it is lagging behind other sectors such as industrial at 11%, lodging at 5% and apartments at 4%.

Meanwhile, cap rates have moved very little over the past three years, ranging between 5.6% and 5.74% since 2015, according to CBRE’s Q3 Self Storage Investor Survey. The report predicts that cap rates will remain stable, rising 25 basis points or less over the next year. Some of the factors supporting steady cap rates even in a rising interest rate environment are rental rate growth of 3.5% and buyers who may be attracted to the sector as a “safe haven” for capital if there is an economic downturn ahead, according to CBRE.

Another good year ahead?

“We are not seeing any weakening of contract pricing. However, the number of offers per deal is lower than 12 months ago,” adds Compton.

For example, quality portfolios that were generating six to 10 offers in 2017 are now seeing three to five, he says. Yet buyers are willing to act quickly on assets where there is a strong interest. For example, Compton’s team launched a three-property portfolio in October and had an aggressive and acceptable offer within four hours of it hitting the market.

There continues to be a bid-ask gap between buyers and sellers, which is resulting in deals taking longer to get deals done. But, ultimately, buyers and sellers are reaching agreements on most transactions, says Clark.

“Looking ahead to 2019, as long as there aren’t any significant macro changes to the world or U.S. economy, I would anticipate that we will see much of the same,” he says. “Deals will take longer to get done, but we’re still getting transactions closed and we continue to see new funds continuing to make acquisitions in self-storage.”

Beth Mattson-Teig