Self-Storage and the Real Estate Cycle: and More and... · Self-Storage and the Real Estate Cycle:...
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Transcript of Self-Storage and the Real Estate Cycle: and More and... · Self-Storage and the Real Estate Cycle:...
Self-Storage and the Real Estate Cycle: Market Dynamics, Property Value
and More
Presented by:
Michael A. Mele, Senior Managing Director of InvestmentsMarcus & Millichap; Senior Director, National Self-Storage Group
Agenda
Where we are in the real estate cycle
How changes in the cycle affect facility value
Factors to consider when valuing a property
The effects of new construction on property value
Secondary and tertiary markets to consider
Where We Arein the Real Estate Cycle
Where We Are in the Cycle
Market fundamentals
Sales and transaction volume
New listings per quarter
Inflation vs. treasury
Interest rates
Investor sentiment
“We executed at a high level and produced great results coming off 2015, the best year for storage. 2016 same-store revenue increased 6.9% and NOI grew 9.2%.” ~Joseph D. Margolis, Extra Space Storage
“Occupancy for many in the industry, and here at Life Storage specifically, is at a record high for December,
and we've hit record highs almost every month this year.”~David L. Rogers, Life Storage
“Full-year 2016 same-store net operating income growth of 10.2% represented our highest internal growth rate over this last five-year period of extremely strong storage fundamentals.”~Christopher P. Marr, CubeSmart
Market Fundamentals2016 was another strong year for self-storage.
*Preliminary estimate for trailing 12-months through 4Q; includes sales $1 million and greater
Sources: Marcus & Millichap Research Services; CoStar Group Inc.
119143
217
250263
279
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283302
364
462
500
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$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
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100
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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*
Bil
lio
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Transaction Activity Dollar Volume ($Billions)
Sales and Transaction VolumeQuantity of Sales Transactions in a Specified Period
Source: New Marcus & Millichap listings per quarter exceeding $1M dollars
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10
20
30
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50
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Apartments Self-Storage
New Listings Per QuarterLooking at the Market Differently (New Listings Q1 2004 to Q4 2016)
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
Core Inflation Long-Term Inflation Average 10-Year Treasury Long-Term Treasury Average
Inflation vs. TreasuryInflation Is Limited, but Trends Show Pressure
Interest Rates
No Obvious Drags on the U.S. Economy Stimulate Fed Pressure
Current market
• Favorable current economic conditions
• Upward pressure on inflation
Effect
• Green light for the Fed to increase interest rates again in September and December
• Upward pressure on financing and corresponding pressure on cap rates is expected
80
100
120
140
160
180
200
2004 2005 2006 2007 2008 2009 2010 2011 2012 3Q2013
1Q2014
3Q2014
4Q2014
3Q2015
1Q2016
3Q2016
4Q2016
Source: Penton Commercial Real Estate
Investor SentimentFeeling or Tone of a Market – It’s Crowd Psychology
How Changes in the CycleAffect Facility Value
How Changes Affect Facility Value
Expectations vs. reality
Then vs. now
New competition
Implications of rising interest rates
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
6.00%
6.50%
7.00%
Note: Analysis reflects stabilized deals originally listed over $5,000,000.
Expectations vs. RealityWidening Bid-Ask Spreads Will Affect Sellers
3-Property Portfolio in Tampa, FL MSA Extra Space Managed - Closed 3/23/2016
Sold -
$47,925,000
Salient Data
Trailing Cap Rate 4.18%
Year-One Cap Rate 4.68%
# of units 2,291
NRSF 223,903
Price per NRSF $214.04
Salient Data
Trailing Cap Rate 6.11%
Year-One Cap Rate 7.16%
# of units 4,782
NRSF 644,795
Price per NRSF $81.19
9-Property Portfolio in TexasExtra Space Managed - Closed 3/1/2017
Sold -
$52,350,000
Then vs. NowWhere Self-Storage Cap Rates Have Trended
Initial Assumptions
GPI $1,500,000
EGI $1,200,000
Economic
Occupancy80%
NOI $720,000
Selling Cap Rate 6.00%
Sale Price$12,000,00
0
Loan Details
LTV 75%
Interest Rate 5%
Term 10
Amortization 30
New CompetitionInitial Pro Forma Projections
Year 1 Year 2 Year 3 Year 4 Year 5Rental Rate Growth 4% 4% 4% 4% 4%Economic Occupancy 83% 83% 83% 83% 83%
EGI Growth 7.9% 4% 4% 4% 4%
Year-5 Cash-on-Cash Return = 12.6%
Pro Forma Projections With New CompetitionYear 1 Year 2 Year 3 Year 4 Year 5
Rental Rate Growth 0% 0% 4% 4% 4%
Economic Occupancy 83% 83% 83% 83% 83%EGI Growth 3.8% 0% 4% 4% 4%
Year-5 Cash-on-Cash Return = 8.8%
To maintain an identical cash-on-cash return given the new pro forma expectations, you would need to reduce the sales price from:
$12,000,000 to $10,570,0006.0% cap rate 6.81% cap rate
c
All else equal, a 100bps change in loan cost, drives a 42bps increase in the cap rate to achieve a similar cash on cash return.
Year 5 CoC
@ $12,000,000 Value Cap Rate
5.00% 12.6% $12,000,000 6.00%
5.25% 12.1% $11,795,000 6.11%
5.50% 11.5% $11,595,000 6.21%
5.75% 10.9% $11,400,000 6.32%
6.00% 10.4% $11,210,000 6.42%
Maintain 12.6% Year 5 CoCLoan
Rate
Initial Assumptions
GPI $1,500,000
EGI $1,200,000
Economic
Occupancy80%
NOI $720,000
Selling Cap Rate 6.00%
Sale Price $12,000,000
Loan Details
LTV 75%
Interest Rate 5%
Term 10
Amortization 30
Initial Property Value 100bpsInterest-Rate Increase
New Property Value
$12,000,000 $11,210,000
Implications of Rising Interest RatesImpact of Rising Loan Interest Rates Holding All Else Constant
Factors to ConsiderWhen Valuing a Property
Other Factors to Consider
Location and market types
Supply and demand
Uncovering missed opportunities
Shifting demographics
Location and Market Types
Property selection
• Proximity to major highway
• Traffic counts and visibility
• Proximity to major retail areas
Demographic requirements (3-mile radius)
• Population over 50,000
• Median household income over $50,000
Market type determination
• Primary, secondary, tertiary
Supply and demand
• Less than 7 rentable SF per person in subject area
Supply and Demand
Primary markets – often undersupplied
• High barriers to entry limit new competition.
Secondary and tertiary markets – often oversupplied
• Less restrictions makes access to market easier.
• Increased competition reduces rental ratesand occupancies.
• Increased competition increases rental rate volatility.
Oversupplied markets – increased risk
• Investors seek a risk premium and demandhigher returns.
• Demand for higher returns drive increased cap rates.
Uncovering Missed Opportunities
Upside potential
• Look at economic occupancy and examine expenses (i.e., room for cuts).
Under-market rents
• Complete rent surveys in prospective areas.
Poor management
• Review operating statistics for underperformance.
Market selection
• Complete demographic analysis (e.g., populations, median incomes and traffic counts).
Shifting Demographics:Population Projections
56,000,000
58,000,000
60,000,000
62,000,000
64,000,000
66,000,000
68,000,000
70,000,000
U.S. Population: 10-Year Projection for Ages 20-34
Shifting Demographics:Population Projections
U.S. Population: 10-Year Projection for Ages 20-34
24.00%
25.00%
26.00%
27.00%
28.00%
29.00%
30.00%
31.00%
32.00%
16,000,000
17,000,000
18,000,000
19,000,000
20,000,000
21,000,000
22,000,000
23,000,000
24,000,000
18-34 Year Olds Living With Parents Percent Living With Parents
Shifting Demographics:Population Projections
U.S. Population: Ages 18-34 Still Living at Home
Not my grandparents at 65!
Shifting Demographics:Population Projections
U.S. Population: Age 65+
25,000,000
30,000,000
35,000,000
40,000,000
45,000,000
50,000,000
55,000,000
60,000,000
65,000,000
70,000,000
Shifting Demographics:Population Projections
U.S. Population: Age 65+
The Effects of New Construction on Property Value
The Effects on Property Value
National vacancy and rate trends
Construction outlook
Construction spending
New competition volatility analysis
0.0%
2.0%
4.0%
6.0%
8.0%
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12.0%
14.0%
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20.0%
$13.50
$14.00
$14.50
$15.00
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
20121Q
20122Q
20123Q
20124Q
20131Q
20132Q
20133Q
20134Q
20141Q
20142Q
20143Q
20144Q
20151Q
20152Q
20153Q
20154Q
20161Q
20162Q
20163Q
20164Q
20175Q*
Average Asking Rent/SF Vacancy
*Forecast rent for 10-by-10 unitSources: Marcus & Millichap Research Services; Reis Services LLC
National Vacancy and Rate TrendsU.S. Facility Vacancies and Trends Among Offered Rates
1,462 currently tracked in the pipeline
Construction OutlookSelf-Storage Construction Developments
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
Construction SpendingSelf-Storage Construction Development by the Millions
Our Construction Analytics
Current Projects Tracked in Pipeline 1,462
Select Markets Study Adjustments 25% / 10%
Adjusted Project Pipeline – 25% Up Estimate 1,828
Projects Under Construction – 10% Up Estimate 293
Census/Bureau of Economic Analysis
Construction Analytics
Construction Spending Through Dec.
2016$1.907 Billion
Average Facility Size (GSF) 95,000
Average Facility Cost ($GSF) $70
Average Facility Cost $6.65 Million
Projected # of Facilities Under
Construction287
Estimate of Potential Developments
Based on BEA Data1,791
Likely Projects
16% of Projectsin Pipeline
Census Data
Construction SpendingSelf-Storage Construction Projections
Initial Assumptions
GPI $1,500,000
EGI $1,200,000
Economic
Occupancy80%
NOI $720,000
Selling Cap Rate 6.00%
Sale Price$12,000,00
0
Loan Details
LTV 75%
Interest Rate 5%
Term 10
Amortization 30
New-Competition Volatility AnalysisInitial Pro Forma Projections
Year 1 Year 2 Year 3 Year 4 Year 5Rental Rate Growth 4% 4% 4% 4% 4%Economic Occupancy 83% 83% 83% 83% 83%EGI Growth 7.9% 4% 4% 4% 4%
Year-5 Cash-on-Cash Return = 12.6%
Pro Forma Projections With New CompetitionYear 1 Year 2 Year 3 Year 4 Year 5
Rental Rate Growth -5% -5% 4% 4% 4%
Economic Occupancy 80% 80% 83% 83% 83%EGI Growth -5% -5% 4% 4% 4%
Year-5 Cash-on-Cash Return = 4.3%
To maintain an identical cash-on-cash return given the new pro forma expectations, you would need to reduce the sale price from:
$12,000,000 to $8,860,0006.0% cap rate 8.13% cap rate
Secondary and Tertiary Markets to Consider
Markets to Consider
Methodology
Macro to micro approach
• State selection (factors considered):
o GDP growth
o Population growth
o Unemployment rate
o Median household income
o Fiscal solvency
o Business and personal tax burden
o Regulatory policy
States Selected
DC - 121
23
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89
10
1113 14
15
Markets to Consider
Markets to ConsiderMethodology
Macro to micro approach (continued)
• City selection (established criteria):
o Population
Greater than 50,000 but not in a primary city
Population growth in excess of 2%
o Median household income of qualifying cities
Exceeding $65,000
o Competition analysis
Number of competitors
Average 10x10 CC rental rate exceeding $15
Low current development pipeline
Cities Selected
Jupiter, FL
Population 59,880
Median Household
Income$69,945
Number of Competitors 7
Population Per Facility 8,554
Average 10x10 CC $190.80
Annual $/SF $22.90
Parker, CO
Population 53,121
Median Household
Income$101,831
Number of Competitors 8
Population Per Facility 6,640
Average 10x10 CC 148.20
Annual $/SF $17.78
Castle Rock, CO
Population 56,962
Median Household
Income$103,253
Number of Competitors 8
Population Per Facility 7,120
Average 10x10 CC 152.50
Annual $/SF $18.30
South Jordan, UT
Population 64,293
Median Household
Income$95,154
Number of Competitors 3
Population Per Facility 21,431
Average 10x10 CC $134
Annual $/SF $16.08
Markets to Consider
Conclusions
Conclusions
Nearing the end of the cycle
New supply coming online
Shrinking buyer pool
Pressure on valuations
Contact the Presenter
Senior Managing Director InvestmentsThe Mele Group of Marcus & Millichap813.387.4790michael.mele@marcusmillichap.commelestoragegroup.com
Michael A. Mele
