Construction Limited, Demand Sustained by Job Gains
By Staff @ Marcus and Millichap
Modest improvements in the national economy will be sufficient to prompt households to migrate to major employment centers, driving uneven demand for self-storage space in the coming quarters. Although the pace of job growth has been concentrated in certain areas of the country, just over 40 percent of the 8 million positions lost during the recession have been recouped. In the Eastern and Western regions, for instance, significant growth in the tech and pharmaceutical industries generated solid employment gains, especially in Boston, New York City, Seattle, and San Francisco. Job seekers who moved to these areas typically downsized into rentals due to the high costs associated with home ownership, prompting many residents to utilize self-storage space for larger household goods. In Texas, Pennsylvania, Oklahoma and North Dakota, meanwhile, the natural gas and oil boom contributed to the creation of more 500,000 jobs since the start of the recovery. However, many of these new positions are transitory, which encourages workers to enter the renter pool or live in company-provided housing, generating demand for self-storage space. When payroll expansion filters into slow-recovery markets, overall demand for self-storage units will make a broad-based recovery.
In the low-yield environment, buyers seeking alternative investments will place capital in self-storage properties to capture higher returns. With interest rates near record lows, institutions will use leverage to purchase portfolios. After acquisition, these investors will maintain control of the Class A assets located in primary markets, while non core products will be divested to raise additional cash. Cap rates for high-quality assets average just below 7 percent, which will allow buyers to secure debt from the re-emerging CMBS market or life insurance companies. Value-add buyers chasing higher profits, meanwhile, will find opportunities in secondary and tertiary markets as REITs dispose of lower-tier assets. Additionally, distressed product will also surface as owners with maturing loans are forced to sell at a discount or face foreclosure. Many of these properties will trade below replacement cost and receive a cash infusion to modernize the amenities. After the renovations are complete, the owner will re-brand the property and reduce the expense load to bolster cash flow.
2012 Self-Storage Outlook by Region
210 basis point increase in occupancy; 80 basis point increase in occupancy; 130 basis point increase in occupancy; 160 basis point increase in occupancy
East: Supply constraints and robust in-migration will support firm demand for self-storage space as many of the new residents will refrain from purchasing a home in the near term. As a result, occupancy will finish 2012 at 87 percent, marking a 210-basis point improvement from year-end 2011. Landlords will lift asking rents 4.8 percent this year to $1.10 per square foot.
Midwest: Steady growth in manufacturing will support demand for commercial storage in the Midwest as businesses store excess parts in commercial units to reduce expenses. Occupancy levels will rise 80 basis points this year to 80.8 percent, while asking rents will jump 2.8 percent to $0.77 per square foot.
South: Robust employment growth in the region will continue to attract residents to the area, many of whom will enter the rental pool and store excess household items in storage units. As a result, occupancy will climb 130 basis points in 2012 to 81.3 percent, bolstering asking rents by 1.3 percent to $0.76 per square foot.
West: Demand for self-storage space will be sustained by foreclosure activity in the West as well as the firm population growth taking place in areas such as Arizona, Washington and California. Occupancy will increase 160 basis points in 2012 to 83 percent, while owners will gain sufficient leverage to hike asking rents 1.8 percent to $1.12 per square foot.
■ Occupancy: Robust job growth of over 100,000 new positions in the last year supported firm leasing activity. Occupancy rose 110 basis points to 81.2 percent, while in Washington, D.C., occupancy surged 470 basis points to 88 percent.
■ Rents: The solid occupancy gains supported modest rent growth of 1 percent in the Mid-Atlantic sub-region over the past four quarters to $1.00 per square foot. The rate is just 1 percent below per-recession levels.
■ Occupancy: In the Northeast sub-region, solid population growth enhanced demand for self-storage space. Occupancy in the sub-region spiked 380 basis points in the last year to 85.4 percent, the largest increase in the country. In the New York-Newark metro, occupancy surged 590 basis points to 85.9 percent.
■ Rents: Owners capitalized on the robust demand and limited competition by raising asking rents 3.8 percent year over year to $1.10 per square foot. Philadelphia recorded the largest growth of 5 percent, pushing rents to $1.05 per square foot.
East Sales Trends
■ Cap Rates: As the cost of capital remained low, deal fl ow for self-storage properties accelerated in the last year, which helped tighten cap rates 20 basis points to the low-7 percent range. Assets in supply-constrained markets, such as New York City, traded near 6 percent.
■ Prices: Th e median price in the East held relatively fi rm at $54 per square foot compared with a year ago. Th e median for institutional-quality assets was near $170 per square foot, while older, Class B/C product captured $41 per square foot.
East North Central Trends
■ Occupancy: Healthy gains in manufacturing helped spur demand for self-storage space in the subregion, where occupancy rose 50 basis points in the last year to 80.5 percent. Detroit, Indianapolis, and Columbus in particular recorded firm growth as occupancy increased an average of 680 basis points in the areas.
■ Rents: Despite rent growth of 11.9 percent in Cincinnati, asking rents in the sub-region remained unchanged in the last 12 months at $0.75 per square foot.
West North Central Trends
■ Occupancy: Occupancy levels in the West North Central sub-region finished the first quarter at 80 percent, which mirrors the rate recorded a year ago.
■ Rents: In Minneapolis and Kansas City, operators gained sufficient leverage to boost asking rents an average of 7.1 percent year over year to $0.75 per square foot. However, rental rates in the sub-region held constant at $0.75 per square foot.
Midwest Sales Trends
■ Cap Rates: Intense investor demand for self-storage buildings in the region helped compress cap rates 90 basis points from one year ago to the high-7 percent range.
■ Prices: The median price in the Midwest held firm in the last year at $31 per square foot, while assets in Chicago fetched the highest median price in the region. Buildings in Indianapolis traded at a modest discount compared to the region.