Interest Rates dropped in early 2019 to all time lows spurring the continuation of investor and developer activity.
Significant equity remains to be placed in self storage as we see new investor and developer groups entering into most, if not all geographical markets. Experienced or not, investors need to continue to closely scrutinize new self storage development projects.
Canada remains a development market with an onslaught of ground up and conversion projects underway. Investors are not yet ready to pay premium pricing based upon aggressive cap rates in most suburban markets. However, core urban markets are experiencing aggressive pricing, especially Toronto.
Many US submarkets are over developed forcing rental rate decline and tougher competition, making it difficult to maintain occupancy in saturated areas. Institutional operators will often put stress on local, smaller players by undercutting rental rates to capture a greater tenant market share. Smaller operators and developers should note “this is not a good time to be fully levered up on your projects”. We’re starting to see the decline in debt service coverage ratios on several projects as a result of rental rate and occupancy decreases. In overbuilt markets, selecting and knowing the right buyer pool is critical to selling a property at maximum value.
Cap rates continue to compress on key acquisitions where investors see value fit to existing portfolios or as an entry into key strategic markets.
Conversely, properties in non-primary markets are selling at higher cap rates. Owners may choose to hold properties, waiting for a more aggressive investment cycle.
Self storage technology continues to make new advances in security features, upgraded site and unit entry systems, and many other aspects. Numerous providers are reaching out to owners to upgrade existing sites and incorporate the latest technology in new and existing construction.
Self storage tenant experiences are now more than ever a strategic focus by operators. Services offered include packing, pick–up and delivery, photographic inventory of belongings, all with the operator reaching out to areas beyond the normal 3 to 5 mile draw.
Local and state governments are becoming more aware of deed transfers and/or membership interest sales and will move quickly to increase real estate taxes to reflect current or increased market values.
The storage industry continues to play a large role in re-purposing a significant volume of vacant retail and warehouse boxes across the US and Canada. These assets are otherwise regarded as non-premium, less desirable properties to investors and users within other real estate sectors.
Wishing you all a prosperous 2020!