self-storage and the real estate cycle: and more and... · self-storage and the real estate cycle:...
TRANSCRIPT
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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
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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
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Where We Arein the Real Estate Cycle
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Where We Are in the Cycle
Market fundamentals
Sales and transaction volume
New listings per quarter
Inflation vs. treasury
Interest rates
Investor sentiment
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“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.
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*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
226
106
161
206
283302
364
462
500
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
0
50
100
150
200
250
300
350
400
450
500
550
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*
Bil
lio
ns
Transaction Activity Dollar Volume ($Billions)
Sales and Transaction VolumeQuantity of Sales Transactions in a Specified Period
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Source: New Marcus & Millichap listings per quarter exceeding $1M dollars
0
10
20
30
40
50
60
70
80
90
100
0
100
200
300
400
500
600
700
800
900
1000
Apartments Self-Storage
New Listings Per QuarterLooking at the Market Differently (New Listings Q1 2004 to Q4 2016)
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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
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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
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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
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How Changes in the CycleAffect Facility Value
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How Changes Affect Facility Value
Expectations vs. reality
Then vs. now
New competition
Implications of rising interest rates
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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
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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
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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
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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
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Factors to ConsiderWhen Valuing a Property
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Other Factors to Consider
Location and market types
Supply and demand
Uncovering missed opportunities
Shifting demographics
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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
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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.
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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).
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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
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Shifting Demographics:Population Projections
U.S. Population: 10-Year Projection for Ages 20-34
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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
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Not my grandparents at 65!
Shifting Demographics:Population Projections
U.S. Population: Age 65+
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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+
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The Effects of New Construction on Property Value
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The Effects on Property Value
National vacancy and rate trends
Construction outlook
Construction spending
New competition volatility analysis
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0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
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
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1,462 currently tracked in the pipeline
Construction OutlookSelf-Storage Construction Developments
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$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
Construction SpendingSelf-Storage Construction Development by the Millions
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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
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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
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Secondary and Tertiary Markets to Consider
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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
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States Selected
DC - 121
23
4
5
6
7
89
10
1113 14
15
Markets to Consider
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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
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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
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Conclusions
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Conclusions
Nearing the end of the cycle
New supply coming online
Shrinking buyer pool
Pressure on valuations
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Contact the Presenter
Senior Managing Director InvestmentsThe Mele Group of Marcus & Millichap813.387.4790michael.mele@marcusmillichap.commelestoragegroup.com
Michael A. Mele
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