The REIT Weekly – Self-Storage Cap Rates Continue Decline

Interest in the self-storage business picks up amongst investors with an eye on high returns. Meanwhile, Fitch Ratings cautions equity REITs considering share buybacks as the result could be lower credit ratings.

According to MJ Partners’ quarterly overview of the self-storage industry, self-storage REITs are experiencing high occupancy levels and rental increases as well as falling cap rates. Principal of MJ Partners, Marc A. Boorstein explains, however, that “we have not seen self-storage development commensurate with the results,” and that “The lack of development is making existing properties more valuable.” The results show strong customer demand and predict a strong year for the industry.

Echoing the same sentiments, more REITs are reported to be taking an interest in the self-storage market. According to Roberto Munoz, a senior associate with Marcus & Millichap, industrial and office REITs in particular are considering self-storage because the facilities are low-maintenance and have high returns. Munoz states, “The market is getting aggressive because returns are in the 6-caps, which we saw back in ’06/’07. There’s not much inventory out there, and the REITs and investors are getting aggressive on these purchases. Investors are coming out, and pricing is getting competitive.”

Fitch Ratings is cautioning equity REITs against share buybacks. “Share repurchases may be a plus for REIT net asset values in the short term, but over time the resultant increase in leverage could impair credit quality,” said Reinor Bazarewski, a director at Fitch. Improved balance sheets and low cap rates influence the appeal of share buybacks, according to the report, which also states that data center and multifamily REITs are the most likely to use share buybacks.

According to industry practitioners, non-traded REITs would experience benefits from proposed FINRA regulations that would increase disclosure of fees. By increasing transparency and product diversity, the changes could help the industry to grow. Scott Crowe, global portfolio manager at Resource Real Estate commented, “The growth potential of this sector is tremendous,” he said. “The real upside is that at the moment, the non-traded REIT market has grown substantially, but really only touches a limited set of the underlying investor base.”