Archives for September 2022

Fewer deals are getting done to buy self-storage properties. Fewer owners are offering their properties up for sale and fewer potential buyers are bidding. The main culprit for the slowdown? Higher interest rates.

One reason is because most potential self-storage investors rely on loans to leverage when making purchases in the sector. As interest rates jumped higher, that has cut into the yield on their potential investments. So, even though the income from self-storage properties is as high as it has ever been, and self-storage properties seem likely to keep performing well in the future, deals are harder to get done, as buyers and sellers work out new market cap rates.

“Values are down slightly relative to March but still meaningfully higher compared to 24 months ago,” says Steve Mellon, managing director of capital markets for JLL, working in the firm’s Houston offices. “That’s a direct response to an uptick in costs of capital. Higher yields are needed to get to the same levered total returns.”

High rents, few vacancies for self-storage properties

Self-storage properties are still earning record-high rents with few vacant units.

“Self-Storage continues to outperform due to additional demand fueled by the pandemic,” says Doug Ressler, manager of business intelligence for Yardi Matrix.

Average street rents remained at the peak levels reached in June for both 10-ft.-by-10-ft., non-climate-controlled units ($132) and climate-controlled units ($151). Those are very high rents compared to just two years ago. Back then, average street rents hovered around $115 for non-climate-controlled units and $130 for climate-controlled units. Much of that increase in rents came in just a few months in the spring of 2021.

“We had 20 percent to 25 percent rent growth,” say Noah Mehrkam, CEO of Self Storage Plus. Since then, street rents have risen more moderately. “Now we have ‘normalized’ down to the mid-teens.” Nationwide, average street rents grew 2.1 percent in July 2022 compared to the year before.

High rents at self-storage properties are unlikely to be undercut, on average, by competition from hastily-built new properties. The amount of new supply delivered across the nation in 2022 will be equal to 3.2 percent of the existing inventory and annual deliveries will moderate to 2.5 percent of total stock by 2027, according to the latest forecast from Yardi.

“As construction loans have become more expensive and construction costs have increased, we have seen a slowdown of new development,” says Scott Schoettlin, managing director of Skyview Advisors.

Investors are also drawn to self-storage properties because they seem likely to weather the challenges that now seem most likely in the U.S. economy. For example, if inflation continues, self-storage properties can adapt by quickly raising rents as demand allows.

“Coupling the attractiveness of short lease periods with its history of relatively strong operating fundamentals during periods of economic slowdown, self storage continues to attract new capital,” says Skyview’s Schoettlin. “We expect that trend to continue.”

In a high-profile deal announced this week, Extra Space Storage Inc., a self-storage REIT and management company, acquired Storage Express, including 107 remote-managed properties in Illinois, Indiana, Kentucky and Ohio. In addition, Storage Express Founder and Owner Jefferson Shreve has been appointed to the REIT’s board of directors. Total consideration for the purchase was approximately $590 million.

High interest rates stop many deals from getting done

But interest rates have risen sharply since the beginning of the year. The interest rates for many fixed-rate loans are based in the yield on 10-year Treasury bonds, and that yield was 3.5 percent on Sept. 20. That’s up more than 200 basis points since the beginning of the year.

The Federal Reserve has pushed interest rates higher to fight inflation. Their efforts have certainly slowed the growth in prices for self-storage properties. Potential buyers have trimmed a few basis points from the cap rates they are willing to accept and there are fewer buyers in the market to buy properties, according to the experts interviewed for this story.

“Instead of 20 offers for a property there are now seven,” says Anthony Piscitelli, senior vice president of investments at Arcland, based in Washington, D.C. However, cap rates are still very strong—not far from their lowest lows. “The equity community is still trying to find ways into our sector it still preservers our cap rates.”

Potential buyers are also more selective about what properties they bid on.

“Fully-stabilized properties in top metropolitan statistical areas continue to draw strong interest,” says Skyview’s Schoettlin. “Secondary and tertiary market deals, early lease up, and ‘certificate of occupancy’ deals are still seeing interest but typically have fewer bidders than what we saw at the peak.”

Sellers are less willing to offer properties for sale. “There is less volume because sellers are not as confident that they can get the price they want,” says Piscitelli. “Clearly this is not a great time to sell.”

However, many investors are still eager to put their money into self storage. “Once there is clarity with interest rates, we expect numerous bidders to be active,” says Self Storage Plus’ Mehrkam.

Source: “High Interest Rates Are Slowing Down Self Storage Dealmakers“

Early in the pandemic, travel shut down and hotels and resorts took it on the chin. They largely couldn’t open, many people were scared to go anywhere, and businesses looked to teleconferencing.

Things have turned around since, according to a new report from Green Street. “U.S. resort hotels have enjoyed an unprecedented run of pricing power since mid-’21, with average daily rates (ADR), RevPAR, and hotel EBITDA well-above pre-Covid peaks in many leisure destinations, especially “drive-to” locations,” the firm wrote.

But the real boost has been to resort hotels rather than urban. For example, year-to-date revenue per available room (RevPAR) is up 19% over 2019 for resorts. For urban hotels, it’s down 11%.

Starting in 2017, there was a split in average daily rates, indexed to 2008 prices, between the two categories as well. That really took off as the pandemic settled in. Now the average daily rate in urban is 126 while for resorts it’s 162.

What has helped is consumer response to the pandemic. When people could start traveling again, they showed “surprisingly little price elasticity.” Hotel operators looked to increase per-night rates and help balance out other missing revenue. Business travel was far off and, as Klaus Kohlmayr, chief evangelist for hospitality industry revenue management company IDeaS, told GlobeSt.com last year, “about two-thirds of [hotel] revenue comes from some sort of business travel related segment.” That was a bit part to make up and it’s not returning to normal.

“Green Street estimates that business travel (more concentrated to urban markets) will suffer a 5-10% secular demand impact relative to its pre-Covid trend,” the firm wrote. However, RevPAR will, by the firm’s estimate, move back into rough line with pre-pandemic growth rate.

That said, “quickly normalizing travel patterns, worrying consumer sentiment, and macroeconomic storm clouds” raise questions about the near future and if leisure travel is due for a “course correction.”

As Green Street notes, leading indicators—capital markets performance, personal savings rates, consumer confidence, US dollar currency index, travel costs, and GDP outlook, offer a “concerning look.” That combined with consumer sentiment could “negatively impact leisure travel.”

“Further, an expanding menu of leisure options (e.g., cruises, international destinations) as Covid restrictions / concerns fade suggests that consumers may pay more heed to price going forward than has recently been the case,” the firm said.

In addition, Green Street expects business travel, more often found in urban markets, to see a 5% to 10% secular demand impact compared to pre-Covid.

Source: “Some Leisure’s Been Doing Well, but How Long Can It Last?“

Demand for new, modern warehouse construction is high. It has to be: CBRE reports that the average warehouse age is 43, so developers are building new facilities at record levels as the world manages the supply chain.

Construction activity in 2022, as of the end of the second quarter, totaled a record 627 million sq. ft.

CBRE’s report points out that one-quarter of existing warehouse space “is aged more than 50 years and most of that product tends to have a smaller footprint and lack the features, design and amenities required by modern distributors.

“In contrast, newer warehouses tend to measure larger than 200,000 sq. ft (often into the seven-digit sizes) and feature high ceiling heights, air conditioning, huge floorplans and cross-dock layouts to allow for fast unloading and reloading.”

John Morris, CBRE’s Americas president of industrial & logistics, said in prepared remarks that the warehouse sector has undergone more modernization other than many other asset classes in commercial real estate over the past 10 to 20 years.

Really, any space will do. Warehouses that are older than 40 are 95 percent occupied, CBRE reported.

Distribution Strategy Driving Changes

Brian Gallagher, Vice President, Corporate Development at Graycor, tells GlobeSt.com that changes in distribution strategy, consumer behavior and e-commerce and increased manufacturings are all driving distribution and warehouse construction.

“As a result, we are seeing an increase in investment in speculative warehouses. Much of the inventory under development is quickly being absorbed by retailers and third-party logistics companies.

Gallagher said that, traditionally, many warehouses were built with 20- to-24-foot ceilings and smaller footprints. Now many owners are developing much larger warehouses with 36- to 40-foot-high ceilings and cross-dock layouts.

“Major transportation corridors and port adjacent sites are continuing to attract warehouse and distribution investment. As demand for fast delivery accelerates, there is an increased demand for last-mile facilities located in or near urban centers, this is driving modernizations and renovations on older warehouse facilities and retrofitting, and repurposing buildings originally built for other uses.”

Gallagher said that another trend is the inclusion of technology into warehouse design.

“Warehouse buildings used to be facilities for shipping and receiving, but they’ve transformed into automated high-tech logistics facilities,” he said.

“Owners are increasingly incorporating sensors, automation, and robotics technology to track, handle and manage inventory, and increase productivity and safety while reducing overhead costs.

“Cold storage warehousing demand continues to grow as well. While more expensive to build, these cold storage facilities have unique and special requirements to meet the demands of the clients and specific product types.”

A ‘Safe’ Asset Class

Stephen D. Stein, co-founder/president capital markets, Tauro Capital Advisors, tells GlobeSt.com that he has seen a substantial increase of interest from equity sources looking to partner with seasoned developers, and borrower demand for acquisition financing has never been greater.

“This is an asset class that is perceived as safe with the prospect of long-term demand due to a shortage of inventory,” Stein said. “Geographically, the focus from equity and buyers is concentrated in the Sunbelt states and port cities which have experienced increased interest from a variety of tenants specifically those supporting the electric car market or bioscience.”

Source: “Aging US Warehouses Are Driving Record Development“