Category Archives: Commercial

Property Management: How Important Is It?

I just wanted to take a minute to re-affirm the importance of having the right Property Management Company on your team. I read this article recently in the Sun Sentinel Newspaper in South Florida (November 28, 2014 issue) that really brings to light how important they are.

On July 17, 2012 a slaying took place on a property in which one tenant shot and killed another for no apparent reason. The family of the slain tenant sued the property management company for negligence, arguing they should have known the tenant was a risk and never should have rented his family an apartment. The management company recently settled the suit for $1.5 million dollars.

Florida Law does not require a landlord to run a background screening but does recommend doing so. The management company did run a background screening which revealed the tenant had rented an apartment in another of their complexes and was evicted for causing disturbances and making death threats. The failure by the property manager was in not actually reading the screening which they had paid for and had in their possession.

This was a large management company that this happened to, so don’t think just because they are big they must be good. The situation could have been avoided and a family kept in tact if they would have simply read what they paid to have done, a simple background screening.

Next to buying a property right the most important thing is the management company that is going to run your property and protect your asset. I have heard of several other horror stories just like this one, most of them occurred because as property owners we didn’t do a proper background screening of our property management company.

Don’t be a statistic, do your research and check not only the management company but also the property manager they will be placing on your property. Also, don’t always choose by the price they charge; sometimes the cheapest one might be the best one for the job but not always. Just like the most expensive isn’t always the best choice. Don’t be afraid to pay a little more to get the quality  and piece of mind you are looking for. I promise it will be cheaper in the long run.

Here is a helpful link for property management companies and managers      http://www.irem.org/

In the left column click on “Member & AMO Directories”

 

Office Fundamentals Continue To Improve

By Katie Hinderer – GlobeSt.com

DALLAS–The local office market has seen continuing improvement in market fundamentals in the second quarter of 2014. According to the latest report by Cushman & Wakefield tenant demand is stronger than it has been since 2006.

Direct and overall absorption has reached 2 million square feet in 2014, this is an increase of 37% compared to the 1.5 million square feet absorbed during the same time period in 2013. Major tenants who took space this year include Santander Consumer Finance, Perkins Coie, Lockton Companies, Liberty Mutual, Kohl’s, Nationstar Mortgage, Conifer Solutions, Ernst & Young, Time Warner Cable, Bell Helicopter and Trend HR.

To date there has been 8.3 million square feet of leasing activity, an increase of 9.8%. Class A space accounted for more than half of the leased space (57.3%).

Rental rates have also been rising this year. Asking full-service rental rates rose 3.9% to $21.19 per square foot. Class A space saw the greatest increase, 5.4%, rising to $26.22 per square feet.

During this period 2.5 million square feet of construction projects were completed. Of that, 1.4 million square feet were speculative projects. An additional 5.1 million square feet of office projects are currently under construction, including 12 speculative buildings, which will total 2.6 million square feet. Of this spec space, 30.7% has already been pre-leased. During the third quarter, an additional 2 million square feet of projects will break ground.

Personal Income, Spending Up in May; Mortgage Delinquency Rates Edge Down

By Dees Stribling, Contributing Editor – CommercialPropertyExecutive.com

The Bureau of Economic Analysis reported on Thursday that U.S. personal income was up $58.8 billion, or 0.4 percent, in May compared with April. Personal consumption expenditures – or PCE, as the government calls people out buying things — increased $18.3 billion, or 0.2 percent, month over month.

It turns out, however, that the increase in spending was due to rising prices, even though inflation is still fairly modest. Real PCE — PCE adjusted to remove price changes — decreased 0.1 percent in May, compared with a decrease of 0.2 percent in April.

The PCE price index increased 0.2 percent in May, the same increase as in April, and excluding energy and food, the month-over-month increase was also 0.2 percent. Compared with a year earlier, the May 2014 price index for PCE was up 1.8 percent, or roughly the same as the CPI. Take food and energy out of the equation, and the PCE price index was up 1.5 percent in May 2014 compared with May 2013.

Mortgage Delinquency Rates Edge Down 

Freddie Mac said on Thursday that the single-family serious delinquency rate for mortgages that it owns or insures declined from 2.15 percent in April to 2.1 percent in May. The current rate is down from 2.85 percent compared with May 2013, and is in fact the lowest rate since January 2009; the GSE’s serious delinquency rate peaked in February 2010 at 4.2 percent.

According to the company’s reckoning, “serious delinquencies” involve mortgage loans that are “three monthly payments or more past due or in foreclosure.” Such loans are rarely cured with back payments, but rather end up in foreclosure or a short sale. The “normal” rate for serious delinquencies – the pre-recession average — is about 1 percent, so the current rate is still elevated.

Separately this week, Freddie Mac released its Multi-Indicator Market Index (MiMi), which tracks the U.S. housing market. According to MiMi, most housing markets remain weak despite declining mortgage delinquencies, improving local employment, house price gains, and attractive mortgage rates.

The national MiMi value stands at -3.01 points, indicating a weak housing market overall with only a slight improvement (+0.05 points) from March to April and a three-month trend change of (+0.07 points), which is considered flat. However, on a year-over-year basis, the U.S. housing market has improved by 0.65 points as reflected in the national MiMi, according to the GSE.

Wall Street had a modest down day on Thursday, with the Dow Jones Industrial Average off 21.38 points, or 0.13 percent. The S&P 500 was down 0.12 percent and the Nasdaq declined a scant 0.02 percent.

A Record Low Unanchored Retail Cap Rate

By Jennifer LeClaire  – GlobeSt.com

TAMPA, FL—With a record low cap rate for unanchoredretail that some brokers say signals a recover, East Bay Plaza has trade hands. The Largo, FL retail center sold for $2.95 million in an all-cash deal. The sale price represents $283.63 per square foot.

“The in-going cap rate of 7% is the lowest we have seen for a stable retail center in years,” Franklin Street’sJonathan Graber tells GlobeSt.com. “The market for unanchored retail centers has been improving since 2013 and is approaching levels last seen in 2007 and 2008.”

Graber and Franklin Street’s Rafeal Wright represented the seller, East Bay Plaza Integra, a Florida Limited Liability company. Franklin Street put together this off-market transaction with a 1031 buyer, Warner Enterprises, a California Limited Partnership.

“The seller was an experienced retail owner and developer out of Southeast Flora,” Wright said. “This retail center is located in one of the area’s most important retail sub-markets.

As Graber sees it, this is happening for several reasons. He lists the reasons as: record-low cap rates for triple net and multifamily property; historically low interest rates; a lack of new construction; positive absorption of retail space; and access to attractive financing.

Built in 2008, the 10,401-square-foot unanchored retail plaza is 100% occupied with a mix of national and regional tenants including Einstein Bagels, Anytime Fitness, Liberty Tax Service, Radio Shack, and Zoom Tan. The deal also included a long-term billboard lease.

“With Kimco Realty working on one of the area’s largest retail redevelopments across the street and Walmart opening a new supercenter on the opposite corner earlier this year, this intersection continues to gain in value,” Write tells GlobeSt.com. “Additionally, this area of Pinellas County has some of the strongest population densities and traffic counts in all of Tampa Bay.”

East Bay Plaza is located at 5395 East Bay Drive in Largo, FL. It sits on the southwest corner of US 19 and East Bay Drive.

Oversupply Not an Option In These Markets

By Sule Aygoren – GlobeSt.com

BOCA RATON, FL—Too many apartments, not enough renters? Will an oversupply of development saturate newly recovering markets? How much is too much? Those are the questions that still hit home for multifamily investors in 2014. But are the worries legitimate? For some markets, perhaps. But Jones Lang LaSalle predicts 14 cities will overcome oversupply issues, with Sunbelt markets such as Tampa, Jacksonville and Phoenix shining brightly in the year ahead.

The markets JLL expects to shine into 2017 include: Phoenix, Atlanta, Jacksonville, Tampa, San Diego, Dallas-Fort Worth, San Antonio, Houston, Philadelphia, Orange County, the Inland Empire, Palm Beach, Las Vegas and Memphis.

“Besides construction levels, it’s all about job growth and household growth—those are the two critical demand factors that will determine how metros will perform through the current development cycle,” said Jubeen Vaghefi, international director and leader of the firm’s Multifamily Capital Markets group. “The surprising news to many will be the resurgence of the sunbelt markets over the tech-heavy regions. After some very tough years, that’s where we’re seeing a significant rise in new households as a result of improving economic conditions.”

According to JLL’s Multifamily Outlook report, released last week at the National Multi Housing Council’s Annual Meeting here, the national apartment sector expansion continued in 2013 as occupancy reached a 10-year high of 95.8% and gains averaged 13 basis points a quarter. In addition, as expected, 2013 turned out to be a record-breaking year for multifamily sales as volumes totaled more than $100 billion—outpacing 2012’s velocity by nearly 30% and surpassing the 2007 record by nearly $6 billion. New York, the greater Washington, DC area and Los Angeles led in sales volumes with a combined total of more than $30 billion. Dallas and Houston rounded out the top five, followed by San Francisco, Atlanta and Phoenix.

“A large component of these record volumes was needle-moving portfolio sales, ownership entity transfers and mergers of major apartment operators,” explained Brady Titcomb, vice president and director of US Multifamily Research at JLL. “In addition, the US recovery over the past 12 months, rising consumer confidence and still historically low interest rates played a critical role in aiding growth by propelling the housing market recovery.”

The JLL report showed that the housing recovery is causing expansion nationwide. In addition, tightening market conditions brought US quarterly rent increases for 2013, averaging 75 basis points a quarter with high-tech and STEM employment centric markets driving the most notable rent growth.

On a year-over-year basis, the JLL report showed that Seattle, Nashville, San Francisco, Denver and Houston have led in annual rental growth averaging between 4.5% and 7%.

The report also showed that since 2012, uncertainty overseas has driven demand for US multifamily product back to pre-recessionary levels. While international capital has found its way to nearly all of the major metros, Dallas, New York, Chicago, Houston and South Florida each saw more than $300 million in cross-border capital since the start of 2012.

According to the NMHC’s quarterly survey of apartment market conditions released in October, following four years of almost continuous growth, apartment markets have begun to slow. NMHC’s vice president of research and chief economist, Mark Obrinsky, says, “Conditions cannot continue to improve indefinitely and new development is at least somewhat constrained by available capital, though more on the equity than the debt side.”

But overall, the strength of the fundamentals will continue to propel the sector, according to Vaghefi, “We expect multifamily performance to remain strong for the foreseeable future. While there are some supply concerns that will slow the pace of occupancy and rent growth, overall the anticipated increase in job growth and household formation will help to mitigate the threat of oversupply and keep conditions balanced across the country.”

With continued improving economic conditions nationally, JLL anticipates US occupancy gains to average 40-60 basis points annually over the next three years. Assets located in secondary markets and value-add opportunities will be in higher demand as the search for yield becomes increasingly difficult.

Demand in Houston Still Strong as Economy Prospers

By Amalia Otet, Associate Editor – MultiHousingNews.com

Strongly supported by a thriving energy sector as well as a robust multi-family industry, Houston’s economy is expected to experience further growth throughout 2014. Employment gains are projected to come from a wide array of industries, including manufacturing and professional services as well as corporate expansions, which will yield 111.700 jobs in 2014 and a 3.9 percent jump in payrolls, according to research data from Marcus & Millichap.

Investor interest in the Houston apartment market remains strong, with all property size tranches having recorded an increase in deals during the past year. While the number of properties sold with more than 100 units increased more than 40 percent, transactions involving assets with fewer than 50 apartments doubled from one year earlier. Marcus & Millichap further reports that Class A assets trade at cap rates of less than 6 percent, while Class B/C properties elicit bids at first-year returns starting near 7 percent.

Vacancy Rate Trends courtesy of Marcus&Millichap

The Houston metro has become an important target market for many out-of-state investors, such as Boston-based Intercontinental Real Estate Corp., which was drawn to the city specifically due to “its impressive commercial resiliency, its vibrancy and diverse economic engine.” The company parted with $61.6 million to acquire the Sawyer Heights Lofts, a 326-unit apartment community in Houston’s Downtown/West Inner Loop.

Rent Trends

Construction activity is also on the rise as the multi-family market tries to accommodate an influx of new residents, particularly young professionals, to the area. Last year, the local market saw the addition of 9,200 units. Despite the considerable completions, all areas of Greater Houston had positive absorption and vacancy remained unchanged in the third quarter of 2013 at 6.4 percent. In the same period, average rents rose 1.8 percent to $903 per month, or roughly $1.02 per square foot. Properties completed in the third quarter were reportedly spread across nine projects and six submarkets. Approximately 657 rental units have been delivered to the fast-developing Greenway Plaza/Upper Kirby submarkets, driving inventory up 4.8 percent.

Marcus & Millichap’s Market Forecast report indicates that residents will occupy an additional 10,000 units in 2014, bringing the overall vacancy rate down to 7.0 percent. Additionally, the pace of rent growth is expected to rise, with average rental rates climbing 3.6 percent to $941 per month.

More than 10,900 new apartments are projected to come online in 2014. Nearly 1,300 rentals will be placed in service in Galleria/Uptown, including ZOM’s latest development, The Hudson. The 431-unit luxury residential community will be located on a 5.3 acre site on Fountain View Drive at San Felipe Drive near a planned retail center that will be anchored by an upscale HEB Market, as reported by Multi-Housing News Online.

Houston marked an important milestone last year with the re-launch of the Mid-Main project, the city’s first transit-oriented development (TOD). Seven years in the making, the compound will feature 363 apartment homes alongside 30,000 square feet of retail space, in close proximity the METRORail light-rail system.

Charts courtesy of Marcus & Millichap, Apartment Research Market Report, Fourth Quarter 2013

Student Housing Pros: Watch Your Backs

 – NREIonline.com

The long-term outlook for student housing may be positive, but investors and managers should be on the lookout for competition from new construction.

“You are in a maturing industry where a lot of the easy money has already been made,” says Terrell Gates, founder and CEO, Virtus Real Estate Capital.

Experts expect demand for student housing to increase over the next several years. But student housing operators are looking over their shoulders for potential competition, especially in major student housing markets serving large universities. Nearly all of the new beds under construction are being built near the 300 or so largest universities in the country.

Demographics

Enrollment at U.S. universities reportedly declined last year by about 500,000 students. That news set off a wave of speculation that the student housing business might be overheated. Some investors worry that the recent dip in enrollment is the beginning of a long-term trend, as prospective students decide not to take on the burden of student loan debt.

“Students and parents are going to be more discerning on how much debt they pile on,” says Jim Arbury, vice president for the National Multi Housing Council. However, students are still likely to enroll. “An average student might pile up $25,000 in student loan debt. For the average job available to a college graduate, $25,000 is worth it.”

Projections from the U.S. Dept. of Education show college enrollment growing overall from 21 million in 2010 to 24 million in 2020.

In the recent dip in enrollment, the majority of the students who didn’t return were graduate students who have put off further education as the unemployment rate declined. “These are not people traditionally targeted by student housing,” says Terrell. Also the biggest drop in enrollment came at smaller, often more expensive private colleges, while most student housing properties can be found near larger, public universities.

“Nobody has seen a major impact on the great bargain schools, the state schools,” says NMHC’s Arbury.

New construction hits markets

Roughly 50,000 student housing beds came onto the market in the summer of 2013, in time for the 2013-14 school year. Next summer another 50,000 beds should hit the market. That’s up from 40,000 that came on line in the summer of 2012, according to Terrell.

The new flood of student housing follows a long period during and after the crash when very little new student housing was built. Also, the level of new construction is not that large considering that there are more than 20 million students now enrolled in college or university.

However, the flood of new construction is concentrated in the area nearby the roughly 300 largest universities with more than 10,000 students apiece, says Arbury. The newest student housing is targeted even more tightly. Because of the high cost of new construction, these new beds target the wealthiest students who can afford the cost. “You can only make the math work if you’re delivering class-A properties,” says Terrell.

Terrell expects to see more consolidation in the business as more large institution investors enter the space and existing student housing companies grow to an institutional size.  “The news is out: Everyone understands that student housing is recession resilient,” he says. “Consolidation is coming.”

Office Market Remains Stuck in a Rut

 and  – NREIonline.com

The national vacancy rate for office properties remained unchanged during the fourth quarter at 16.9 percent. Given how slowly the office sector’s recovery has progressed, this is not necessarily reason for worry.

Since the third quarter of 2007 the national vacancy rate hasn’t declined by more than 10 basis points in any given quarter. For all of 2013, the vacancy rate fell by just 20 basis points, roughly comparable to the 30 basis point decline in 2012.

National vacancies remain elevated at 440 basis points above the sector’s cyclical low, recorded in the third quarter of 2007, before the recession began that December. Tepid supply growth and lackluster demand have remained largely in balance during this recovery, accounting for the slow pace of vacancy compression.

 

 

With most employment growth coming from low-paying, low-skilled jobs that do not utilize office space, demand remains weak. The amount of occupied stock rose by 8.9 million sq. ft. in the fourth quarter. This is a meager increase from the 7.6 million sq. ft. that were absorbed during the third quarter. This was, however, largely due to a jump in completions. For the quarter, 9.3 million sq. ft. came on-line, up from last quarter’s 6.3 million sq. ft. of new construction.

This dynamic between net absorption and construction held throughout the year. For 2013, quarterly net absorption averaged 7.1 million sq. ft., a 69 percent increase from 2012’s average of 4.2 million sq. ft. For construction, the quarterly average was 6.5 million sq. ft., a 109 percent increase from 2012’s average of 3.1. Demand certainly increased in 2013, with office buildings entering the market mostly occupied (or leasing up quickly). This is in line with strict requirements for pre-leasing from lenders that provide construction and development financing.

The bottom line is that until the growth rate in high-wage, high-skill jobs that require office space accelerates expect slack demand for existing inventory to be the norm and vacancy compression to be slow but steady.

Rent growth plods along

Asking and effective rents both grew by 0.7 percent during the fourth quarter. Asking and effective rents have now risen for 13 consecutive quarters. During 2013 the average asking rent increased by 2.1 percent while effective rent grew by 2.2 percent. This was somewhat better than 2012’s performance when asking rents grew by 1.8 percent while effective rents grew by 2.0 percent.

 

 

Unfortunately, there is too much vacant space for market dynamics to be conducive to significant rent growth. With the national vacancy rate at 16.9 percent and declining slowly, landlords remain unable to drive asking rents upward or pull back on lease concessions. That does not mean that rents are unable to slowly creep up—as they did in 2013—but stronger, healthier rent growth is only possible at far lower vacancy rates such as were observed before the recession. Reis’ historical data indicates that national vacancies need to compress by another 300 basis points before rent growth accelerates on a broader basis. Given the pace of vacancy declines, it will take another few years to get there.

Top metros reap outsized gains

In the current market environment, weakness at the national level does belie strength found in a handful of metropolitan markets and selected submarkets. With the technology and energy industries  continuing to grow and create a meaningful amount of high-wage office-using jobs, the performance of markets with a concentration of companies in these industries continues to excel. This is a familiar trend over the last few years.  The markets with the highest year-over-year effective rent growth in the fourth quarter were San Jose (+5.0 percent), San Francisco (+4.5 percent), New York (+4.2 percent), Houston (+3.7 percent), Seattle (+3.0 percent), Boston (+2.9 percent) andDallas (+2.8 percent).  Also at the top of the list was Orange County (+2.8 percent), a metro we haven’t mentioned much.  A combination of recovering tourism and an increase in demand for space from the healthcare industry has helped support the metro’s office market. Orange County ranked fourth in terms of quarterly effective rent growth (+1.3 percent) in the last three months of the year.

New York has reclaimed the title of the tightest market from Washington, D.C., with a 9.9 percent vacancy rate at the end of the fourth quarter of 2013. Washington fell to second place at 10.3 percent. While both markets experienced vacancy rate increases during the quarter, Washington’s rise is more troubling. While New York’s was likely a short-term aberration, Washington-based employers continue to bear the brunt of budget cuts and political brinkmanship. Although the budget has been passed and the shutdown proved to be ephemeral, haggling over the state of the federal government’s finances is far from over.

Near-term office outlook

The outlook for 2014 is for moderate improvement versus 2013. Many companies refrained from hiring in 2013 because of so much uncertainty. As this fog of uncertainty dissipates, particularly surrounding policy making in Washington, D.C., it should serve as a catalyst for hiring. We expect that the labor market, including the professional, managerial, technical and sales-related occupations that typically reside in office buildings, will improve throughout the year. Therefore, we anticipate that vacancy compression will increase modestly, to about 40 basis points.

Rent growth should continue to accelerate next year, rising by close to 3 percent on an asking rent basis and by over 3 percent on an effective rent basis. It has taken the economy and the office market years to claw their way back from the depths of the worst recession since the 1930s. 2014 is not likely to be the breakout year, but there are reasons to be more optimistic.

Brad Doremus is senior analyst, and Victor Calanog is head of research and economics, for New York-based research firm Reis.

Self-Storage Rents, Revenues Attract Investor Recognition

Robert Carr – NREIonline.com

Self-storage property owners have increased their income this year because they are enjoying the best of both worlds—lower vacancies and higher rents. In fact, increased rental rates haven’t deterred customers, so owners continue to lift unit rates higher every few months to see how high they can lift the ceiling.

The industry has about 91 percent occupancy, with the rental rates averaging just more than $87 a 100-sq.-ft. ground level, non-climate-controlled unit, the asking rate matching the peak following the housing collapse in 2009. Rental income in second quarter 2013 was up about 4.1 percent from a year prior, says R. Christian Sonne, executive managing director at the company and author of the Self Storage Performance Quarterly report.

“We used to have, on average, about 1,000 new properties being built a year nationwide, this year there’s only 117,” Sonne says. “For self-storage, the two pillars of success are population growth and time, and that’s happened. With little new building and high demand, the owners can raise rents whenever they want—and they are.”

Marc Boorstein, principal of Chicago-based MJ Partners Real Estate Services, said in his recent second quarter report that the low homeownership rate, which is still down about 4 percent from a decade ago to 65.1 percent, means that there’s more people renting. Homeowners tend to move, the typical time a storage unit is needed, a lot less than renters, Boorstein said.

Boorstein said the main four public REITs: Public Storage, Extra Space Storage, CubeSmart and Sovran Self Storage Inc., saw revenues grow 5 percent to 9 percent in the second quarter. This compares sharply to the performance of all four in the second half of 2009, where revenues dropped to negative 6 percent, according to the Cushman & Wakefield report. Revenue rocketed up starting in the first half of 2010, and hasn’t dropped or plateaued since.

However, REITs still only make up a small percentage of self-storage ownership, with private owners still the majority owners of most properties. The trusts have been trying to increase market share, but there’s just not that much being offered, Sonne says. “There’s been about $2 billion in portfolio acquisitions in the past couple of years, including Storage Deluxe’ $560 million East Coast portfolio sale to CubeSmart last year. They are trying to find portfolios, but there’s just not that much out there.”

In a recent deal where trusts have succeeded, Glendale, Calif.-based Public Storage was reportedly the winning bidder last week to acquire Harrison Street Real Estate Capital’s joint-venture stake in a 43-facility portfolio owned by Matthews, N.C.-based Morningstar Properties LLC for $315 million. Private investors are still trying to jump into the self-storage sector, Sonne says, though the niche label is hard to overcome.

“We’ve seen huge interest by companies such as Prudential, Heitman, Blackstone, Starwood Capital and retirement fund firms,” he says. “Self-storage had the lowest loan loss of any other sector during and since the recession, and the highest consistent returns. We’ve also seen interest from cross-over players, by those who invest in apartments on the private equity side; the Carlyle Group, for example, is looking for the right partner to get into self-storage. With the few new properties coming online in the next 18 months, our forecast for the sector is pretty strong.”

Storage Wars: Investor Demand Grows for Self-Storage Properties

Michael Bull – Bull Realty – NREIonline.com

In the past, self-storage properties were often overlooked by investors, but that’s not the case anymore. While many other sectors of commercial real estate were hit hard by the recession, the self-storage industry weathered the storm with minimal damage. As vacancy rates fall and rents grow, investor demand for self-storage properties continues to rise.

Those were a few of the points made during the most recent episode of the “Commercial Real Estate Show” radio program, on which my guests and I discussed sector fundamentals, new construction and investor appeal.

Strong fundamentals

“Self-storage isn’t as glamorous as a high-rise office building or a mall,” said Michael Scanlon, president and CEO of the Self Storage Association. “We’ve always been relegated to secondary status in the commercial real estate industry. However, during the recession, many of the big segments took a nosedive, and self-storage sagged a little but didn’t take the same nosedive.”

Fundamentals have really been improving during 2013, which is a continuation of the last couple of years, said Ryan Severino, senior economist at Reis. Vacancy dropped from 14.9 percent at the beginning of the year to 12.6 percent in the third quarter, he said. Asking rents have grown 2.1 percent year-to-date.

In 2014, vacancy rates are expected to drop by another 80 basis points, and asking rents are expected to grow by about 2.8 percent, Severino added.

“The self-storage sector is sneaky big,” Scanlon said. “In 2013, all 30 teams in the NFL generated $9 billion in total revenue, while the music industry generated about $21 billion, and self-storage generated $24 billion.”

Increase in supply

During the last couple of years, 300 to 400 new self-storage facilities have been constructed, Scanlon said. With the economy continuing to improve, it’s estimated that as many as 800 new facilities will be constructed in 2014.

“Supply is increasing relative to where it’s been the past few years, but I don’t see it being an impediment to the market’s recovery,” Severino said. “We expect to see vacancy rates continue to trend down, which means we expect to see net absorption outpacing new construction.”

Despite the amount of properties being developed, building a self-storage facility can be tricky, Scanlon added. For most investors today, due to soaring construction costs it’s cheaper to buy a facility and fix it up than to build.

“When we started, we used industrial-zoned land in heavy commercial areas for self-storage facilities,” Scanlon said. “More recently, we are building in light-commercial and semi-residential zoned areas, and we’ve had to build them with more curb appeal.”

Investor demand increases

“We are now a mainstream part of portfolios that are involved in commercial real estate,” Scanlon said. “People are hedging their bets by putting some money in self-storage.”

Investors who are interested in entering the self-storage market should consider finding a facility they like and asking to invest in the owner’s next property, Scanlon said. “Country club money is how a lot of small operators get their money to build or expand,” he said.

Before purchasing properties, investors should perform a full audit, said Scott Zucker, partner at WZEM. “It’s important to have a good idea of what’s going on inside the facility and who the tenants are,” he added.

Access to the property and new developments around the area are also important factors to take into consideration, Zucker said. “Curb cuts are there so trucks can access the property,” he said. “If there’s a lot of development in the area, road access and access into the property can be affected.”

Cap rates for self-storage are about 6 percent for class-A properties, 7 percent for class-B properties and 7.5 percent for class-C properties, Severino said. In comparison, mean cap rates for apartments are about 6.4 percent, and cap rates for retail are about 8.1 percent.

“Investors are still being choosy about what they buy and sell,” Severino added. “Transaction volumes for all property types are down relative to what they were before the recession. Even with that selection bias, self-storage holds up well relative to the other property types.”

The entire episode on the self-storage industry is available for download atwww.CREshow.com. Michael Bull, CCIM, is the host of the nationally syndicated Commercial Real Estate Show and founder of Bull Realty, Inc., a U.S. commercial real estate sales and advisory firm headquartered in Atlanta.