When a group of six self-storage facilities came up for sale in May, the bidding became ferocious. More than a dozen investors made offers for the properties located in Northern New Jersey, New York City and Long Island, N.Y.
The winning bid came from Storage USA, a unit of General Electric, which paid $70 million for a capitalization rate of about 7%. While the price was steep, brokers say the sale was particularly noteworthy because of who was bidding.
Of the contenders, eight were pensions and other big buyers who had never owned a storage facility before. “I have never seen so many institutional offers,” says Aaron Swerdlin, the Houston-based director of the storage group for CB Richard Ellis, the broker that represented the seller.
Long considered a niche business, storage facilities have begun emerging as a mainstream investment. Some pension funds now believe they should diversify their real estate portfolios by including storage holdings. Financing has been plentiful from well-known names such as GE Capital, Lehman Brothers and Prudential Financial.
Interest in the sector has grown since the economy softened in 2000. While many office buildings have suffered from a double-digit vacancy rate, self-storage occupancy dropped only slightly, from 87% in 1999 to 85% in 2000, according to Marcus & Millichap, a brokerage in Encino, Calif. Since then, the rate has recovered to around 86%.
During the recession, demand for storage facilities remained healthy as homeowners required a place for their extra belongings. “We saw areas where occupancy of storage facilities went down a bit, but nobody got killed,” says Swerdlin of CBRE. “Investors began to believe that the product is somewhat insulated from recessions.”
Historically, institutions have ignored the self-storage market because it seemed risky. Most of the nation's 40,000 storage facilities are small with prices of less than $1 million, reports the Self Storage Association, a trade organization in Springfield, Va. Customers rent space for periods of three months to two years.
That seemed like a shaky market compared with trophy office buildings occupied by long-term, blue-chip tenants. But recent defaults of storage facilities have been rare, and prices have skyrocketed. Indeed, cap rates, or the initial return based on the purchase price, dropped from 10.6% in 2000 to 7.6% in 2004, reports CBRE.
Real estate investment trusts (REITS) and other large owners have been buying family operations and introducing new cost efficiencies. Sovran Self Storage, a Buffalo-based REIT that operates 256 properties, recently bought a family-owned facility in Stamford, Conn., for $13.7 million, or a cap rate of about 9%. While the property was well run, the company figures it can boost the profit margin. “We can buy insurance a lot cheaper than a small owner can, and our company has one call center to handle inquiries from all our properties,” says David Rogers, CFO of Sovran.
Though competition from big buyers can be difficult, many small private companies have also been entering the business, says Greg Wells, a broker with Grubb & Ellis/BRE Commercial in San Diego. Wells recently sold a facility in Palm Springs to a family partnership that had previously owned only apartments.
The family paid $1.28 million for the 18,000 sq. ft. building for an aggressive cap rate of around 7%. The buyers sought to diversify their portfolio and to own a property that requires relatively little interaction with tenants.
“When a tenant vacates an apartment, you may have to replace the carpets and fix the plumbing,” says Wells. “When someone vacates a storage unit, you sweep it out and it is ready to rent.”