2013 will go down as a record-setting year for self-storage acquisitions, with more than $2 billion in deals set to be on the books by the end of December. Low interest rates and a wealth of capital chasing self-storage opportunities are among the factors that have motivated operators to bulk up their storage holdings this year.
Public Storage Inc. alone was poised to surpass $1 billion in acquisitions in 2013. Extra Space Storage Inc. closed or had under contract more than $500 million worth of acquisitions, and CubeSmart LP was close behind with more than $400 million in acquisitions this year. In fact, within the span of a few weeks this fall, CubeSmart and Public Storage closed two of the biggest self-storage deals ever in the U.S.
Will the Stars Be Aligned Next Year?
The conditions that made the past year so robust remain in place heading into 2014, and brokers are forecasting another big year for acquisitions. But brokers said it’ll be tough to beat 2013.
“I think there is certainly the possibility that last year can be duplicated, but I think the stars will have to align even more so than they did for 2013,” said Aaron Swerdlin, executive managing director of the Self Storage Group at NGKF Capital Markets.
For acquisition activity next year to be on par with 2013, Swerdlin said, access to capital will need to stay the same and the amount of investment in the industry must remain steady.
Economists think interest rates might creep up at the end of 2014, which might slow the market down, especially for mom-and-pop sellers.
— Brett Hatcher, associate director, Marcus & Millichap’s National Self Storage Group
One of Swerdlin’s concerns going into 2014 is that some investors that have been sniffing around the self-storage sector might move to other investment types because competition from major self-storage operators has been so stiff.
“You have large private equity firms trying to place $50 million to $100 million in the product type but have been unable to do so,” Swerdlin said.
Swerdlin expects private equity firms to step up efforts in 2014 to invest in self-storage, potentially through joint ventures with self-storage operators.
Brett Hatcher, associate director of Marcus & Millichap’s National Self Storage Group, said he also expects 2014 to be a solid year for acquisitions.
“These larger companies can still get debt at a pretty good rate,” Hatcher said, “and it is still a good time to sell.”
One variable that might slow down activity in late 2014 would be a looming hike in interest rates.
“Economists think interest rates might creep up at the end of 2014, which might slow the market down, especially for mom-and-pop sellers,” Hatcher said.
Motivation for Sellers
Whether or not interest rates will rise significantly in 2014, the possibility alone will spur some owners to put their facilities up for sale.
“We’ve had a record year of portfolio transactions, but the challenge is there is not as much product availability,” said Chris Sonne, executive managing director of Cushman & Wakefield’s Self Storage Industry Group.
More inventory will pop up if operators who have loans coming due decide to exit the business and sell instead of refinancing.
“With the cost of debt likely to rise, a lot of folks will contemplate a sale,” Sonne said. “If you own one or two facilities and you have debt coming due in ’15 or ’16, you might want to start looking to sell now.”
But the majority of those sellers aren’t scheduled to arrive for another two years, when 10-year CMBS loan maturations are set to peak, Sonne said. Meanwhile, the relative lack of supply still will weigh on the acquisition market.
“There are lots of buyers, but not so many sellers,” Sonne said.
Another factor that will provoke sellers in 2014 is continued pressure from the major self-storage operators, according to NGKF’s Swerdlin.
“Some sellers are getting the sense that operationally, this is a box where you have to be extremely smart, spend a considerable amount on technology and have to be more active in management then you ever had to be,” Swerdlin said.
Sellers in those shoes may be tempted to hang it up if they can fetch a fantastic price on a facility or portfolio in 2014.
“I’m telling people now, ‘Let’s go right now. Now is the time to go’,” Hatcher said. “The market is at its peak.”
REITs Remain Dominant
Publicly traded self-storage REITs completed the bulk of the acquisitions in 2013, and they show no signs of letting up in 2014. Case in point: Public Storage recently said it secured a $700 million one-year loan to help pay for acquisitions.
During a November conference call with Wall Street analysts, David Doll, president of the real estate group at Public Storage, said the REIT would continue to pick up assets as they become available.
“Clearly, more product has come to the market in the last six to seven months than we’ve seen in a number of years. So if it does come available, we’ll continue to be active,” Doll said.
David Rogers, CEO of self-storage REIT Sovran Self Storage Inc. (Uncle Bob’s), said the company is ready to use its line of credit to buy properties. During the first nine months of 2013, Sovran spent more than $50 million on acquisitions.
Spencer Kirk, CEO of self-storage REIT Extra Space, expects acquisition activity to be healthy again next year, but he offers a cautionary note.
“I think through 2014 you will see a pace that is at least comparable to what you have seen in 2013, but I will also put a caveat that the larger asset pools for larger portfolios are becoming more and more scarce,” Kirk said during a conference call with Wall Street analysts.
Swerdlin said it remains to be seen how willing owners of large portfolios will be to part with their property.
“If this year taught me anything, there are a lot of groups out there I never thought were sellers that turned out to be prolific sellers. Absolutely, the portfolios are out there that could become acquisition candidates,” Swerdlin said. “Do they decide to sell? That is a whole other question.”
If they do, one of the REITs certainly will come courting, he said.
“If their appetite is as strong as it has been all year long, unless their capital structure changes, then they will continue to be extremely competitive on the acquisition front,” Swerdlin said.
A Window for Smaller Operators
Because REITs seem to have an iron grip when it comes to acquisitions in key markets, Sonne said smaller operators often hold an advantage with acquisitions in smaller markets.
“The REITs focus on the top 50 MSAs,” Sonne said. “They are not as interested in everything else.”
While cap rates tend to be higher in secondary markets, there isn’t as much competition from buyers, so prices tend to be lower.
“There is a great opportunity for small operators to fill in that niche,” Sonne said.
Photo of David Rogers courtesy of BuffaloNews.com