Year in review: Analyzing the self storage industry by Malagisi

Nick Malagisi, Sperry Van Ness Commercial Realty

For the past six years, I have been invited to participate on a national broker panel at UBS headquarters. This panel is part of a day-long self storage REIT conference held annually in New York City.

An earlier panel in the day featured CEOs from five publicly traded REITS in the real estate industry. They answered questions from an audience made up of analysts from the “top looking down.” Meanwhile, our humble broker panel took questions from “boots on the ground, and up.”

Part of our responsibility during the day-long event is to make ourselves available to the various analysts. Institutional interest in the self storage sector has never been stronger, and I found myself booked with meetings every half hour for the balance of the day after our national broker panel interview for the first time in my six years attending this conference.

And why not? The cap rates for stabilized class A product in our industry are lower than every other product type, except for apartments. Plus, self storage has the lowest default rate of all the product types in the CMBS market! Furthermore, year over year growth in NOI has ranged from a low of 6.9% to a high of 9.5% in each of the last five years coming out of the last recession. Yes, the stock prices of the five publicly traded REITS took a sharp decline in the 4Q of 2016. Why was that?

Apparently, the analysts noticed that that the rate of growth began slowing down in 3Q of 2016. Many of the analysts are looking ahead and seeing higher interest rates affecting cap rates with new development coming online while comparing the self storage industry to the rest of the commercial real estate industry. Have we seen the peak of the real estate cycle already? Well, yes, we are only going to see a more normal 4-5% NOI growth instead of the 7-9% growth of the past 5 years. Obviously the stock market is all about anticipating what’s coming ahead.

National economists are predicting a 3% GDP growth rate this year thanks to the positive Trump administration stimulus agenda, and commercial real estate should participate in the demand for new space for businesses. Let’s hope that politics doesn’t get in the way of the economy.

Nick Malagisi, SIOR, is the national director self storage at SVN Commercial Real Estate Advisors, Buffalo, N.Y.