The first quarter of 2019 has been a wild one in the Canadian Self-Storage Industry. We have seen large portfolio purchases as well as a number of one off purchases in Major population Centers that have set new records as well. At present, these sales indicate a continued downward trend of Cap rates in the Canadian Self Storage market. Sales that confirm this Downward trend began in Q4 of 2018 with the sale of the Self Storage Co. portfolio to Public Storage in Ontario at a Cap rate described as Sub 5% for four facilities with over 270,000 ft2 of rentable area.
The continuation of this downward trend was reinforced by sales of two facilities in the Lower Mainland of British Columbia and two sales in Ontario. The first of the sales in Vancouver was of Freeway Mini Storage which closed in late November 2018 at a cap rate based on actual performance below 4.5%. This sale even when stabilized to market levels yielded a Cap rate in the 5.5-5.75% range which for an older Class B facility with limited redevelopment potential is a record in Vancouver. We also saw the sale of a Class “A” facility in Abbotsford BC that set a record for Cap rates in Secondary markets in Western Canada. This sale of a facility that was not stabilized at the time of sale is reported to be at an actual Cap rate of 4.75% and has a stabilized rate in the 5.5-5.7% range.
In addition to the sales in British Columbia, Storage Vault Canada (SVI) acquired two facilities in Ontario for a combined purchase price of $10,460,000 at Cap rates that are best described by industry participants as at the low end of the current range given the size and location of the facilities.
In February of 2019, Storage Vault Canada announced the purchase of the Real Storage Portfolio (38 facilities in BC, Alberta, Manitoba and Ontario) for $275 Million dollars with a closing date later in 2019. The real storage portfolio consisted mostly of facilities in secondary markets with a few assets located in Primary markets such as Toronto Edmonton and Calgary. Analysis of this sale indicates a Cap rate below 4.75%. Given the secondary market locations of the majority of the assets in this portfolio as well as factoring a portfolio premium for the bulk purchase of the group of assets, this transaction points to falling Cap rates in all markets and a Cap rate after factoring out the portfolio premium of between 5.25% and 5.75%.
Off Market Sales
In the first quarter of 2019 we have been involved in a couple of off market sales in BC and in Alberta. These sales took place in February and March and we both as a result of unsolicited offers to purchase. Considering the fact that the facilities in these transactions were not for sale and that an above market price may have been paid for the facilities to entice the owner into selling the asset, we are still seeing some downward trends in Cap rates. Both of these transaction would are in markets that would be considered secondary markets.
In addition to the above listed off market sales, we have been involved in negotiations on two Class “A” facilities as consultants and independent third parties assisting in valuation. Neither facility has yet to come to the point where both parties are happy with a price however, the price range of these negotiations also indicate that Cap rates have progress downward from 2018.
Reason for Downward Trend
There are a few reasons that we can see for the continued downward trend in Cap rates in Q1 of 2019. At present and discussed in our Q3 2018 Cap rate article, the arrival of outside money into the self storage space has forced what was once a very insular community to either pay prices based on lower Cap rates than they are typically use to or, sit on the sidelines while the new players acquire assets that are available. This has caused a continued compression of the overall market Cap rates for self storage. In addition to outside pressures on Cap rates, we have seen a fall in Bond Yields over the past 4 months and this has signaled that lending rates will hold steady if not fall slightly moving forward. Below is a chart showing the decline in the Government of Canada 5 year Bond. We have also been told from a few clients that at present they are seeing lending rates slightly favourable to the rates they were offered in Early to Mid 2018. A reduction in the cost of Capital will allow lower Cap rates to be paid while still providing a good return on investment thus allowing for lower Cap rates to be used on purchases.
The final thing allowing Cap rates to continue to fall is the compression of Self storage Cap rates when compared to Light Industrial product. We are currently working on a full analysis of this trend for a feature in April however the high-level takeaway is that the Self-Storage asset class is slowly being perceived as less risky by investors and lenders than in the past thus allowing Cap rates of self storage to move closer to that of Light Industrial Assets.
Although we do not have a crystal ball, the trend of declining Cap rates appears to be here at least in the short term. Recently, the bank of Canada has changed its guidance from a rising rate environment to one where rates will remain stable for at least the next few quarters in Canada. With out this upward pressure on interest rates, we would expect the current trend to continue moving forward.
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