The self storage industry has certainly demonstrated its resilience over the past several years, gaining the attention of bigger players with access to inexpensive capital. Given the highly competitive investment market, we sat down with Brett Hatcher of the Hatcher-Coe Group of Marcus & Millichap to learn trends he’s observed in recent months. Continue reading below for more information.
Question: The competitive environment has made investing in self storage challenging for the traditional investor. How are you seeing buyers adapt?
Answer: I am seeing buyers put more equity down. There are also more interest only deals for the first couple years in order to drive income and to make up for the lower cash flow on day one. This also offsets the real estate tax increase.
Q: What advice do you have for investors as they navigate competition from new entrants?
A: As the market has become significantly more competitive for buyers, I have been advising investors to expand their searches to some of the smaller markets that are within an hour of a major market. I have also suggested looking at assets that might be smaller than they normally would purchase because those assets are not as competitive. The rents are increasing in these smaller markets and the development is slower due to higher construction and land costs.
Q: How are investors evaluating markets now?
A: It is a crazy market out there right now; I have never seen self storage values this high in my 16-year career however, with rates and inflation rising, I think we are going to see the beginning of a cool off or possibly a recession. Class A assets prices have been around a 4% cap rate, Class B assets around 5% and Class C anywhere from 6%- 7%. With that said, most investors who purchase assets are expecting to grow the NOI, either through better management, marketing, cutting expenses or expanding the property.
Q: What predictions do you have for the year ahead?
A: I am very bullish on the first two quarters of 2022 and I am a little cautious on the market later in the year if we see interest rates go up three to four times, which the Fed suggested as the plan. We have already seen the ten-year treasury increase since Jan 1 of 2022. I still think the amount of capital in the market will keep driving values and with inflation, it should help owners to continue pushing rents however at some point they have to flatten out if not decrease.
Q: Any final comments regarding the self storage industry?
A: Self storage is no longer the hidden asset class, I get multiple calls every week from real estate owners/investors/developers who say “I have always wanted to be in self storage.” I am confident in the fundamentals of the sector but given the typical cycle of real estate I am always asking myself, “what disrupts this bull market?”
