A recent story in the Wall Street Journal described insider’s surprise at a recent self-storage property deal. It seems Arcadia Realty Trust recently sold 14 self-storage properties scattered across the New York metropolitan area for $300 million to the Storage Post division of Heitman, LLC.
The surprise was the capitalization rate, which was approximately 5.5%. Capitalization rate are used by investors to turn Net Operating Income (EBITDA for you accountant types) in value. Because we in the real estate world are perverse, we divide by a percentage rather than use multipliers like normal people.
So if this portfolio sold for $300 million at a 5.5% capitalization rate, a Net Operating Income of $16.5 million is implied. See how that works?
This capitalization rates puts self-storage in the league of apartments, a sector favored by investors today, many of whom are willing to pay a premium. This does not shock me because the sectors have a lot in common, especially what I call Tenant Inertia.
In the classic definition of inertia things at rest tend to stay at rest. This is certainly true for apartment dwellers, who are unlikely to move unless the motivation is very strong, i.e., a life change (marriage, new child), a physical change in the property or neighborhood (next door neighbors start a meth lab) or a financial concern (like a significant rent increase).
Same with self storage, only the inertia tends to be even stronger. Why? One, the physical aspects of the property are of little concern as long as the unit is secure and two, the magic of automatic credit card payments. A lot of people even forget they rent the unit.
I know this because it happened to me. We had two self storage units for business and were paying $300 to $400 per month for years. When it came time to have some documents destroyed we found that the shredding service also provided storage services. We are now paying $100 per month and we don’t have to schlep the boxes ourselves. My forehead is still recovering from that slapping.
Next up, why this deal may be a bad thing the self-storage sector.