SELF-STORAGE REPORT VIEWPOINT 2016 / COMMERCIAL REAL ESTATE TRENDS. irr.com. An Integra Realty Resources Publication

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1 SELF-STORAGE REPORT VIEWPOINT 2016 / COMMERCIAL REAL ESTATE TRENDS An Integra Realty Resources Publication irr.com Self-Storage Steams Ahead The intense pace of multifamily development and demand are key leading indicators for long-term selfstorage demand. On the investment side, the inventory of self-storage properties available remains low, due to a pull-back in construction during the Great Recession and its aftermath. Though new construction is increasing, especially in metro areas, it s not nearly enough to meet the current demand. As a result, the sector has been boasting strong occupancy and revenue gains, and attracting firsttime buyers. Sellers are experiencing record-level prices, while those acquiring are keeping an eye out for value-add opportunities.

2 $32.7B IRR forecasts $32.7 billion in self-storage transactions in Additionally, REITs are actively expanding their portfolios, while industry consolidation is a trend that will likely continue. It does need to be mentioned, however, that self-storage is a highly fragmented industry, with low barriers to entry. Still, investors are becoming comfortable with owning self-storage properties. As such, aggressive asset pricing has continued into Integra Realty Resources (IRR) forecasts that, given continued demand, lack of supply and plenty of investors from within the industry as well as from other property types, the self-storage sector will remain a very strong investment type for the remainder of the year and into This report will provide an in-depth look at assets that continue generating attractive yield, even with lower cap rates. Continued solid fundamentals guarantee interest from wellfunded private investors and publically traded companies. Low cap rates and impending increases in interest rates also aren t bothering investors; most have indicated that interest rates are expected to increase slowly, meaning little impact on value. Eyeing the Basics Population gains, especially in the south and southwest, have led to an increase in demand for apartment units, which has propelled an increase in multifamily construction. This, in turn, has driven renter demand in storage space. Though new self-storage projects are being built, demand continues to outpace supply. This leads many in the industry to believe there is plenty of opportunity for capital interested in this unique product type. There are, however, some investor drawbacks to this kind of investment. It s true that self-storage assets have inexpensive building and maintenance costs. But, shortterm leases and little-to-no product differentiation can make sustaining a regular revenue flow difficult. But there are many players in this industry, especially private players. For example, Public Storage Inc., the largest self-storage REIT, has only a 5% share of the industry, according to Morningstar s research. 2

3 2016 VIEWPOINT SELF-STORAGE REPORT / INTEGRA REALTY RESOURCES A Booming Sector Despite its drawbacks, the industry remains robust, with revenue hitting $31.6 billion in 2015 and forecast to be $32.7 billion by the end of Revenues will continue to attract more investors to the sector. Though the industry is wellpositioned for another strong year of performance, it must be remembered that self-storage is cyclical. First and fourth quarter are typically lower-demand times, with the summer months quite active. As such, sophisticated operators increase and decrease rent rates daily in response to occupancy to counteract seasonal fluctuation and optimize operations. In 2013, occupancy dropped one quarter earlier than in Occupancy increased during the first and second quarters of In some areas, occupancy showed a slightly greater pull-back in the third and fourth quarters of 2015 than the same period of Overall, occupancy is moving toward or in some cases, has reached a nearstabilized condition, with many losses during and after the Great Recession having been covered. This is true in most major metropolitan statistical areas (MSA) and is happening in secondary markets. OCCUPANCY TRENDS 92.0% 90.0% 88.0% 86.0% 84.0% 82.0% 80.0% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 Southwest South Atlantic Northeast Midwest West U.S. Average 3

4 2016 VIEWPOINT SELF-STORAGE REPORT / INTEGRA REALTY RESOURCES Successful REIT Results The data presented to the right accounts for more than 3,245 self-storage facilities nationwide. These facilities are highly soughtafter investments in their respective markets. The analysis of their performance is an effective barometer of overall trends in the self-storage industry. Improving operations from demonstrate very positive performance. REITs reported a boost in square foot occupancy from 88.2% in 2011 to 93.4% in Overall, rent per occupied square foot averaged 5.9%, with annual ranges from 5.7%-6.1%. Operating expense ratios declined on a recurring annual basis for the past couple of years, mainly due to revenue gains outpacing expenses. Most notable is a net operating income (NOI) increase across the board. NOI increased 9.5% from Rental rates continues to be pushed either by fewer concessions or actual rent increases, thanks to increased performance. This trend will continue unless a significant economic change occurs, or until new supply is added. Low Cap Rates, Aggressive Pricing Cap rates are at historic lows, with an average of 6.5%, and a range of 5.5%-7.0% among storage facilities earning more than $1.0 million annually. Cap rates lower than 5.5% have occurred and will likely continue to occur, especially for Class A facilities, geographically centered portfolios, and some value-add Class B properties with upside potential. Market participants believe that cap rates can t go much lower. Low cap rates don t appear to be bothering buyers, however. Though in general, Class A facilities have cap AGGREGATE REIT PERFORMANCE - SAME STORE OPERATION PUBLIC STORAGE, EXTRA SPACE, SOVRAN & CUBESMART Period Facility Count Occupancy Revenue ) Expense NOI , % 7.3% 2.4% 9.5% , % 6.9% 3.0% 8.7% , % 7.5% 2.8% 9.8% , % 6.0% -1.4% 9.6% NATIONAL CAPITALIZATION RATE TREND 93.4% Occupancy in selfstorage REIT portfolios was 93.4% in 2015, up from 88.2% in Sales Parameters Lowt High Mean Median Sale Price $400,000 $23,100,000 $5,654,699 $4,600,000 Sale Price / SF $23.61 $ $88.45 $71.67 Facility Size (SF) 16, ,557 65,400 60,151 Selling Cap Rate 5.00% 9.04% 6.57% 6.50% rates lower than 6%, it s typically large storage operators that buy the facilities and can achieve operational economies of scale, compared to smaller competitors. These operators are also more sophisticated when it comes to marketing and pricing their units, meaning better performance over smaller facilities. If NOI increases faster in the Class A sector, cap rate spread, based on trailing income versus forwardlooking year-one income, will be greater than for Class B or C properties. Cap rates have stabilized, and many market participants believe they can t dip much lower. As cap rates are tied to interest rates, when interest rates increase, cap rates should follow. But slight interest rates anticipated in 2016, combined with continued strong revenue growth, mean values will continue on an upward trek. However, the rise in interest rates could be the beginning of a slow tapering, or stabilization, of values. 4

5 Comprehensive Commercial Real Estate Market Research, Valuation and Advisory Services About IRR Integra Realty Resources (IRR) is the largest independent commercial real estate valuation and consulting firm in North America, with over 218 MAI-designated members of the Appraisal Institute among over 875 professionals based in our 58 offices throughout the United States and the Caribbean. Founded in 1999, the firm specializes in real estate appraisals, feasibility and market studies, expert testimony, and related property consulting services across all local and national markets. Our valuation and counseling services span all commercial property types and locations, from individual properties to large portfolio assignments. About Viewpoint IRR s Viewpoint represents the compilation and presentation of Commercial Real Estate (CRE) rates, market conditions, and forecast data. The rates, market conditions, and forecast data is generated via IRR s Viewpoint Survey. IRR s Viewpoint Survey requests market experts consisting of Appraisers and Consultants, each of whom have deep CRE expertise, to provide insights on over 60 U.S. markets. Viewpoint data is collected across five asset classes including Multifamily, Office, Retail, Industrial, and Hospitality. Viewpoint s rates data (Cap Rates, Discount Rates, Reversion Rates, Vacancy Rates, etc.) reflects an expert s opinion based on recent market activity experienced in the past 6 months. Viewpoint forecast data represents a 12-month outlook based on current market conditions. The data in Viewpoint reflects rates data and forecasts based on stabilized properties in the respective U.S. marketplace. Where referenced, all regional and national averages are based on simple average calculations and are not weighted. IRR s Viewpoint Survey is conducted through a proprietary data survey tool, and all data is checked both manually and by a specially designed computer editing procedure. While we do not guarantee that the survey is statistically accurate, the Viewpoint data provides, what we believe, is the best, clear-sighted insights into the CRE marketplace. Sources Written By: Steven J. Johnson, MAI IRR - Metro LA Senior Director (Commercial Appraiser) Cover Photography: Seacliff Self Storage, Huntington Beach, CA Photo Credit: Seacliff Self Storage 2015 Occupancy Trends Source: REIS 4Q 2015 Aggregate REIT Performance - Same Store Operation Source: Companies Public Securities Filings, Integra Realty Resources Inc. National Capitalization Rate Trend Source: Integra Realty Resources Integra Realty Resources, Inc. 11 Times Square 640 Eighth Avenue 15th Floor, Suite A New York, NY irr.com This publication includes analyses and opinions provided by third parties, and while the available data is presumed to be accurate, no representation or warranty is made regarding the accuracy of the information contained in this publication. This publication does not render legal, accounting, appraisal, counseling, investment or other professional advice. Should such services or other expert assistance be needed, it is recommended that the services of a competent person or firm, having access to the details of the situation, be employed.

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