Capital Markets And Valuation Trends We See For Self-Storage In 2022

With 2022 off to a bang, I wanted to start out by highlighting one of the asset types that I am seeing getting an enormous amount of attention, not only from the equity side but also from the financing side. That asset would be self-storage facilities, all across the country, and for various types of sponsors.

The economics and demand drivers behind storage are some of the highest they have ever been. Generally speaking, when people move around, they need storage for their stuff. The more people are moving, the more storage you need, and the more your local population increases, the more storage you need. You can see where this is going, as more people than ever are moving and are moving around the country today, self-storage has become a product in high demand. So much so that the margins I am seeing people get on total project cost VS value at C of O are some of the highest throughout the entire industry. I am not talking about 10 – 20% value creation, I am talking about 40% and higher in some cases prior to the asset even leasing up.

I caught up with Ryan McDonald, MAI, FRICS, National Practice Lead of JLL Valuation Advisory’s Self-Storage group, who had the following to say regarding valuation trends; “We have seen cap rates for good quality, well located Class A and B assets decrease between 50 and 100 basis points year over year. Valuations have thus increased significantly in the double digit percentages with no slowdown in sight right now as we look ahead into 2022.”

Even with these types of deal economics, there are still a lot of traditional lenders that are conservative on financing these facilities. Most banks view them as special use assets and they fall into a higher risk tier bucket, which means that they offer lower leverage. But where I am seeing the most aggressive financing is in the private capital space. For instance, we have been putting out loan to costs from private lenders on construction up to 85% for a lot of these deals. For the same assets, we were getting bids at 65 – 70% LTC from banks and credit unions. So the storage industry today is a perfect poster child for the opportunistic nature of private capital VS financing from regulated depositories (banks & credit unions).

Another reason I believe storage construction is seeing a large level of opportunity is that institutional equity has a difficult time chasing these types of deals on a per property basis. Most total project costs I see range from $5 to $20 million at most, which flies just under the level where real institutional equity wants and needs to be. Maybe there is a $50 million storage facility out there somewhere, but due to the dollar amount constraints, we see most institutional players coming in for portfolio acquisitions and consolidation of pools of existing assets.

There has certainly been a lot of maturity in the storage space, but I believe, as most people do, that there is a long road upward ahead of us. Some markets are most likely (most definitely) fully supplied at this point, but if you are looking to areas where the local economy is doing well and the population is increases, you are most likely going to do well on a well located storage asset today.