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REIT stands for Real Estate Investment Trusts.
But, what is a REIT? Simply put, a REIT is a company that owns or finances real estate which produces income. This property may exist across a range of different property sectors.
A real estate company must meet certain requirements to qualify as a REIT.
The majority of REITs trade on the stock exchange.
Investors are talking a good game as they negotiate to buy self-storage properties—but on average, they are still paying high prices and accepting low investment yields.
“I have seen some re-trading… maybe 1.5 percent of the purchase price,” says R. Christian Sonne, director of specialty practices for the national self-storage valuation group at real estate services firm CBRE. “Property assessment reports are being reviewed a lot more closely than a few years ago.
But deals are still getting done at nearly record low cap rates, with multiple potential buyers bidding for most properties, says Sonne.
Self-storage properties remain extremely desirable to investors. Investors are paying high prices despite rising interest rates and reports of overbuilding. Their enthusiasm to buy may be because the percentage of occupied space in the sector is at an all-time-high. Self-storage also earned a reputation for being resistant to recessions during the last economic downturn, giving even more comfort to potential investors.
“There is a great deal of capital pursuing deals and, in some cases, we’re seeing aggressive pricing—especially in high-density urban markets,” says Wayne Johnson, chief investment officer with SmartStop Asset Management, a diversified real estate company focusing on self-storage, student housing and seniors housing.
Investors accept low yields
The yields that investors are willing to accept for self-storage properties have been very consistent over the last few years, even as interest rates have slowly begun to rise. Cap rates for self-storage properties averaged 6.5 percent in the third quarter of 2018, according to Real Capital Analytics (RCA), a New York City-based research firm. That’s up slightly from the low point of 6.3 percent in 2017, though cap rates have lingered in the mid-6.0 percent range since the end of 2015.
Other market watchers see a similar steadiness in the self-storage sector, though they may be taking data from a slightly different set of properties. Since 2015, cap rates for these properties has averaged between 5.74 percent and 5.60 percent, according to CBRE.
The yield on investments in self-storage properties has stayed low even as interest rates have risen, including the benchmark yield on 10-year Treasury bonds, which was above 3.0 percent for most of October, up more than 150 basis points from its most recent low point in the spring of 2016.
That can’t last forever, especially as Federal Reserve officials plan yet another increase to their benchmark interest rate targets before the end of 2018.
“I was concerned about cap rates rising two years ago, and it didn’t happen,” says CBRE’s Sonne. He expects cap rates to inch upwards as much as 25 basis points over the next year. That would reflect some, but not all, of the anticipated Fed increases to interest rates.
Strong demand for self-storage supports high prices
Investors continue to pay high prices for self-storage properties as customers continue to fill new properties as they open.
“New supply continues to put pressure on rent growth in many markets. However, we have not observed any widespread lack of demand for physical space and most new properties are leasing up at the anticipated physical occupancy trend,” says Ryan N. Clark, director of investment sales for SkyView Advisors, a national self-storage brokerage based in Tampa, Fla.
Even in cities where developers have opened many new properties, they tend to compete only with properties in very close proximity. “Self-storage trade areas are very small,” says Sonne.
Two-thirds of self-storage customers rent space at a facility within two or three miles of their home address. That means a self-storage property should not be hurt by competition from new properties more than three miles away. However, the local nature of the business also magnifies the damage caused by competition from properties down the street or near the same freeway exit.
Rents at self-storage properties will likely rise by an average of 3.5 percent over the next year, according to CBRE. That’s a steep drop from the double-digit rent hikes that were common earlier in the cycle. “Rent growth will be closer to the rate of inflation over the next year or two,” says Sonne.
The percentage of self-storage units that are occupied has risen to unheard-of levels, well above 90 percent, according to reports from leading self-storage REITs. “That was not believed to be possible,” Sonne notes.
However, the customers who use self-storage are becoming more consistent, as they often use their storage spaces to compensate for smaller living spaces, especially in urban areas. They are using self-storage for longer periods of time, averaging15 to 18 months, up from stays of less than a year on average in earlier decades, according to CBRE.
“It’s more a part of a lifestyle, not just in response to a life event like a divorce or leaving school,” says Sonne. “Some of the strongest rents and the most demand is in urban infill locations, where people don’t have a second or third bedroom to store their stuff.”
This story by Bendix Anderson
When you start your first job as a self-storage facility manager, you may not know what to expect. The experience may surprise you! Here are five things one employee wishes he’d known in advance.
The interview is over, and you’ve been offered a job as a self-storage facility manager. What you should expect when you first start your new role may surprise you! Following are five things I wish had known in advance.
Demand Is High
In the city where I grew up, there were only a handful of self-storage facilities. Over the last 20 years, the area has boomed to include 45 or more locations. As I drive through familiar areas now, I’m always surprised to see a new facility or construction. I probably notice them more now that I work in the industry. I’m always trying to discover what other companies are doing or creating to bring in business.
Before I got into self-storage, I never realized how much demand there is for the service. All types of people going through life-changing experiences need storage. Death, divorce and moving are some of the most popular reasons for people to visit my office and inquire about sizes and prices, climate control or drive-up storage, and even vehicle parking. The need willalways be there if people continue to accumulate things.
The Importance of Paperwork
I’m so grateful that the manager for whom I worked in the beginning was intentional in keeping good notes on accounts. I learned from her that whenever someone comes by the office or calls to inquire about his account balance, you should make a note in the tenant file.
I also learned all the paperwork we should keep on file for each customer. We save a copy of the tenant’s lease agreement and driver’s license as well as insurance paperwork. Over time, we add any returned letters, receipts, vehicle information, lock-cut information and much more.
While I never would’ve guessed how much documentation was maintained, I’m sure glad it is. So often, we’ve been able to reference it; and when it comes to information, it’s better to have too much than too little.
The Amount of Work Behind the Scenes
When I interviewed for an assistant manager position, I was told the job would likely involve more manual labor than the manager’s job. I would spend most of my time cleaning vacant units, changing out latches or weather stripping, vacuuming hallways, and handling many other maintenance tasks. But I never realized just how much there is to do behind the scenes.
I’ve had it said to me more times than I can count that some of our customers assume we spend all day in the office waiting by the phone and computer. At our company, we’ve made it a mission to provide “Easy, Clean, Service.” That’s revealed in the ways we care for our properties, including the office and bathrooms.
There’s always a list of things to accomplish at my facility. In one recent week we painted the bollards, rented a few units, cleaned vacated units, vacuumed the hallways, wiped down the unit doors and even created a couple of new units. If there’s one thing I’ve learned, it’s that there’s always something to do!
The Laws That Govern
There are laws that protect self-storage customers and those that give facility operators the right to enforce a lien and hold a public auction of delinquent units. The first time I had to witness a lock-cutting due to nonpayment, it was extremely heart-wrenching and emotional. I remember going home in tears because I felt I was ruining someone’s life. I thought we were invading his privacy, taking pictures and documenting items to place an ad in the newspaper.
Then came auction day, which was even harder. Just a few days after the sale, the customer came to the office to make a payment and get a wheelchair out of the unit for her brother. We hadn’t been able to reach her by phone, e-mail or mail, and I had to tell her the unit had been sold. I’ll never forget the shocked look on her face and her demand to speak to my supervisor, who told her that if she changed her contact info and never notified the office, there was nothing she could do. I never saw her again.
The Love for the Job
I absolutely love what I do. I work for an incredible company. It’s family-owned, and each employee is treated like family. The relationships I’ve built with customers, coworkers, supervisors and office personnel have benefited me more than any amount of pay.
I can’t wait to get up in the morning and arrive at the office! People from all walks of life come through my door to rent units, buy merchandise or make a payment. I’ve met folks from several countries who’ve rented because they’re in the military, attending the local university or moving to find a better life. My customers have ranged from age 19 to 95.
I’ve also had great mentors, and now do what I can to pass knowledge forward to new employees. I’ve had the opportunity to travel to Kansas City, Mo., and Minneapolis to help new and current managers learn about the business. I’ve even attended a corporate retreat. All in all, I wouldn’t trade a thing about my job.
No matter how long you’ve worked in self-storage, take in all the information you can. Learn from your peers, supervisors and even your competition. Build relationships. Show up every day ready to absorb something new. Not every day will be the same, and if it is, only you can change that.
Here’s my final advice: Be honest with your customers. Be fair and be consistent. As one mentor told me many years ago, “Tie your shoes every morning so you won’t get tripped up by the small things.” Results don’t always come right away. Be consistent, and they will.
Story by Kevin Lanning for Storage Mart.
Kevin Lanning has been a facility manager for StorageMart since 2014. Founded in 1999 and based in Columbia, Mo., the company operates more than 200 self-storage properties across Canada, the United Kingdom and the United States. Kevin lives in Omaha, Neb., with his wife, Krystal. His outside interests include photography and woodworking. For more information, visit www.storage-mart.com.