Cushman & Wakefield’s Self-Storage Advisory Group is coming off a busy year, brokering $412 million in property sales nationally. The SpareFoot Storage Beat recently spoke with Mike Mele, vice chairman and group lead to hear about what drove that growth, as well as his views on what’s ahead for the self-storage investment market in 2020.
SpareFoot: What were some of the factors driving sales for your group last year?
Mele: We have a lot of long-term relationships. We also did a couple of large deals that accounted for a large chunk of that volume. The main thing is that there is just a tremendous amount of money out there chasing deals. That is driving the prices and driving a really high number of transactions, not just with us, but for almost everyone out there.
According to Real Capital Analytics, 2019 sales increased 9% year-over-year to $5.6 billion. What do you think is in store for 2020? Is there good momentum ahead for investment sales?
Yes, I do. Everything that we’re seeing looks like it should be another good year. Our pipeline is very strong. We don’t see anything in the economy that leads me to believe that there could be a slowdown.
Every time we think we have hit it; we seem to burst through a new ceiling of potential buyers. If anything, we have seen cap rates compress a little bit on the income-producing or cash-flow debt type deals, probably as a result of low rates and a result of people looking for anything that has yield, which is hard to find in any property type.
Some of the data suggests that cap rates have been fairly flat, what are you seeing for cap rates?
Cap rates are pretty steady, but there is a slight compression. Our average trailing cap rate from 2018 to 2019 went from a 5.25 to a 5.18%. So, slightly compressed and that might even be within the margin of error. It’s holding steady, because people are really trying to get into this business.
Where we are seeing things not go as well is on the C/O and development deals. Pricing there is probably going the other way. As we have seen street rates become a little questionable and even going backwards, with the proformas that a lot of these developers had, it’s very hard for buyers to say we are fully on board with this. That is pushing pricing downward. People are just not as willing to take the risk on something that doesn’t have the cash flow.
So, those deals are definitely harder to sell, but the cash-flowing deals with anything existing and perhaps some upside, those continue to be very hot commodities.
The supply pipeline continues to be a topic at the forefront. Aside from the new development deals, do those supply concerns have a broader effect on buying decisions?
Yes, buyers are definitely looking at it, but it has to do more with how much is in that 3- to 5-mile circle. How many new projects are in lease-up? How many projects are in the pipeline and under development? And how is that going to affect where my current numbers are? It’s not unusual for us to look up a property and find 13-15 square feet of storage per person. If there is a lot, the buyers are less willing to push that price and are a little more conservative. If there is not a lot of space, then they are very willing to push that price.
What do you see on the supply side? Is there still a good amount of assets on the for-sale market, or is it starting to get a bit thin?
There is definitely a steady stream. The question is how much of them are saleable. I’m hearing from other people that there is a lot of properties out there that are not priced correctly. At the price the owner wants, they’re probably not going to sell. So, I think it is hard to find legitimate properties that are truly for sale that are going to meet the market. That is getting a bit more challenging across the board.
On the other side, C/O properties are tough to sell, but there could be buying opportunities there as pressure to get equity back keeps coming. We have a deal in Houston where the developer purchased the land in 2014. They are not fully finished with all the phases of the project yet, but here we are in 2020. What is built is only 20% occupied and the equity has decided they want out. So, it is time to put it on the market and get what they can get. I think you are going to see more of that over the next year or two. It’s not distressed where they will be selling for a really low price, because there are too many people willing to buy them once they get to a level that is somewhat reasonable.
Are there any other trends that you’re seeing in terms of where capital is flowing, or what regions are really hot right now?
Capital is fairly spread out nationally. Looking at development, it is not slowing down as much as we had thought. Activity is maybe only 10% less than the year before. But the top 25 markets are definitely way down on new development, and where you’re seeing development now is in secondary and tertiary markets. So, the hot areas are finding markets that haven’t been overbuilt yet and there is opportunity for growth. That may not be a top 25, or even a top 50 market.
Are there any other comments you would like to add about what’s ahead for 2020?
I think it’s going to be another strong year. Cushman & Wakefield data shows that all commercial real estate investment sales activity was up 11.5% in 2019. We will be hard pressed to beat it by another 10%, but I do think it will be pretty close to where we were last year. There is just so much demand that the supply will give in and decide to sell.