A Guest Installment by Amber Hagopian, Associate Director, HFF
Values of self-storage properties in most markets are at all-time highs, but there may be some misconceptions in the market about the valuation at which an asset will actually trade. While we are seeing large portfolios and class A properties in top-10 metropolitan statistical areas trade on stabilized cap rates (net operating income divided by purchase price) between 5 and 6 percent, this is not the case for most other facilities.
As a self-storage owner looking at the possibility of selling in what we would definitely call a sellers market, one of the first things to consider in valuing your property is that cap rates vary widely based on property profile and market. A suburban, single-row, class B asset will not trade at the same cap rate as a large portfolio transaction or class A property in a premium location.
Institutional capital able to pay the most aggressive prices will typically have greater underwritten expenses than non-institutional operators. This holds true especially for expense items such as advertising, call centers and onsite management. Pro forma expenses should also take into account any increase in property taxes related to a sale.
In the second quarter of 2013 self-storage was the No. 1 top-performing asset class among all real estate investment trusts (REITs). Due to its attractive yield and stability, there is a plethora of institutional capital looking for a way into the product type, pushing cap rates to all-time lows. With market pressure on the REITs to continue to grow, low cost of capital and a surplus of both institutional and private capital looking for transactions, the current acquisition environment is very competitive and should continue to remain that way for some time.
While cap rates are at historical lows, interest rates have already started to increase slightly, and we expect cap rates to reflect this by the first quarter of next year. Self-storage owners considering the sale of a facility should be cognizant of the underwriting practices of the most aggressive capital as well as timing of a transaction and set valuation expectations accordingly.
Amber Hagopian is associate director for HFF (Holliday Fenoglio Fowler LP), a provider of commercial real estate and capital-markets services to self-storage and other commercial sectors. The companys self-storage professionals offer a range of solutions including investment sales, debt placement, joint venture/equity placement and consulting services. Since 1998, HFF has brokered or financed more than $2.2 billion in self-storage transactions. To reach her, call 512.532.1929; e-mail [email protected]; visit www.hfflp.com/selfstorage.