Investment in self-storage on the rise, says M&M

Real Estate Weekly, March 16, 2005

Marcus & Millichap Real Estate Investment Brokerage Company recently released its 2005 National Self-Storage Research Report, which indicates that investors are gaining interest in the self-storage sector due in large part to a favorable lending environment and significant investor competition in alternate property sectors.

"Sales velocity for self-storage throughout the country was up 10 percent last year, driven by activity in the North Central and Northeast regions, where velocity more than doubled," comments David A. Wetta, national director of Marcus & Millichap's National Self-Storage Group.

"Overall dollar volume reached nearly $800 million, up 50 percent from the prior year and more than two times the volume reported in 2001."

The report also details markets of prime interest. In the West, slower construction activity, solid job growth and strong net in-migration will keep markets such as Los Angeles, Riverside and San Diego on investors' radar screens. Other markets attracting investors include Washington, D.C., Fort Lauderdale, Atlanta, Phoenix and Chicago, along with Minneapolis, Orlando, Las Vegas and Boston. The 2005 report provides in-depth coverage of key markets, broken down into the West, South Central, Southeast, Northeast and North Central regions.

Following are some of the most significant aspects of the National Self-Storage Report:

* Construction activity was brisk in 2004, as almost 15 million square feet came online.

In the coming year, developers will dramatically slow the pace of deliveries by nearly 70 percent to slightly more than 4.6 million square feet. The largest decline will be in the South Central region, where only 400,000 square feet are slated for delivery, down from 2.8 million square feet last year.

* Lenders are starting to view self-storage real estate more favorably as the sector has one of the lowest default rates when compared to multi-family, office and retail properties.

In addition to individual private investors, REITs also have taken note of the potential for stronger returns in the self-storage sector. U-Store-It recently paid $184 million for the Metro Storage portfolio of 42 facilities, making it the sixth-largest operator of self-storage facilities in the nation.

* Following a decline in investment activity last year, self-storage transaction velocity in the West is forecast to rise in 2005.

Markets such as Los Angeles, San Diego and Riverside saw little construction over the last few years, which, combined with strong demand and positive economic trends, will increase demand for self-storage properties in these markets. Even metros that have experienced high levels of construction in recent years, including Phoenix and Las Vegas, will attract investors as strong job growth and in-migration overshadow temporary supply issues.

* Limited supply and relatively high cap rates spurred significant investment activity in the Northeast last year, with transactions in the $10 million-plus category totaling nearly $130 million, accounting for two-thirds of total dollar volume in 2004.

Dollar volume in the Northeast surpassed the $195 million mark-more than the total for the previous three years combined. The median price per square foot rose 32 percent to $65 while cap rates declined by 90 basis points to 8.8 percent. The Northeast also had the highest occupancy in the country, improving 500 basis points to end the year at 88.6 percent. New England markets posted the strongest gains in occupancy at 88.8 percent. Construction regionwide is forecast to continue to decline to 500,000 square feet in 2005.

For a copy of the report visit www.MarcusMillichap.com.