Self-Storage cap rates continued to decline to an average of 5.64%, a reduction of 10 basis points (bps) over Q4 2015, according a new Self Storage Investor Survey released by CBRE’s Valuation & Advisory Services.The decline is due to continued investor interest in the sector and an increasing spread between the average cap rate and 10-Year Treasuries. The spread is now 395 bps, up nearly 14% or 48 bps over Q4 2015.

This compares well with the 15-year average spread of 406 bps for the sector, according to Chris Sonne, Executive Vice President and National Self Storage Valuation Group Leader at CBRE Valuation & Advisory Services. The current level is higher than the 2013 level of 320 bps, and is significantly higher than the spread low of 254 bps in 2006. This suggests cap rates will continue to compress and that self-storage may be less impacted by an increase in interest rates than other CORE real estate, according to Sonne. Terminal cap rates consistently remain approximately 25 bps above overall or going in cap rates.

“In this quarter, we have surveyed market participants about a wide variety of data points including the usual cap rate, yield rate and growth rates,” said Sonne. “Additional information includes trade area size, absorption time, marketing time, profit on costs, optimism index and other metrics.”

CBRE interviewed over 50 market participants including buyers, brokers, owners (small and large operators including REITs, national and regional owners), investors, lenders and REIT analysts. The CBRE Self Storage Investor Survey is published in Q3 to reflect the robust spring and summer seasons, and Q1 to reflect the slower fall and winter seasons common to self-storage. The results of the data this quarter are also compared to a 12-year time series for trend analysis.

Market segmentation remains among Class A, B and C properties. In general, Class A properties have an NOI per sq. ft. at $10 per sq. ft. or higher; Class B are in a range of $6-$10 per sq. ft. and Class C is generally less than $5 per sq. ft. However, there remain variances among markets.

Yield rates declined 12 bps to 8.63%, down from Q4 2015 of 8.75%, according to the investor survey. It is noteworthy that 75% of those interviewed rely on discounted cash flow as the primary tool of analysis, according to Sonne, who noted the anecdotal survey responses indicate this is due to revenue enhancement or management models, or the ability to raise rents on existing tenants at any time. This has resulted in double-digit growth in revenue for the REITs and some operators over the past several years. More recently, revenues declined from double-digits a year ago to the 5-8% range, but still over double CPI and outperforming other sectors. Revenue management success is likely to continue, but at a slower pace as occupancy and rent increases have grown significantly.

Forecast rental growth rates have declined slightly since 2015 according to CBRE, consistent with the pattern of slower revenue growth due to revenue enhancement models, to 3.55% currently. The growth is lower than increases of the past few years because respondents are using 10-year hold periods most often for discounted cash flow models that consider both boom and bust cycles, according to the survey. Expense growth factors increased nominally to 3.01% from 2.94% Q4 2015.

Both trade area size and demand of square-foot-per-person remain relatively level. A 3.25-mile trade area radius is typically utilized for suburban self-storage, while urban markets use a smaller radius and rural markets use a larger radius. Some argue that the Internet may have increased trade areas. The average estimate of demand of 7 sq. ft. per person in the U.S., down slightly. Some respondents said slower construction the last few years has actually decreased the amount per capita, while others expressed concern of new supply coming to the market

Average absorption time declined to 27 months, a significant decrease over time (36 months in 2011). This may be considered a good indicator of market conditions or reflect greater discipline in site selection among developers. In the survey, 40% described market conditions as being at equilibrium; 39% as under-supplied; and, 21% as over-supplied. Marketing time (average time estimated to sell a property) increased slightly to four months. Brokers report increased activity in the sector results in longer closing times due to “intense” negotiations among final offers.

Profit factors increased dramatically, as a ratio of new construction hard or direct costs. The range is 15% to 50% with an average of 25%, the highest recorded in the 12-year history of the survey. Indirect costs averaged 15%.

Most interviews were either in person or by telephone, including conversations at the Self Storage Association convention in Las Vegas in September. All interviews referenced in this report occurred in the Q2 2016.

CBRE Valuation & Advisory Services has a dedicated NAV team that allows them to streamline the NAV valuation process, resulting in a consistent and timely product for clients. CBRE’s Valuation & Advisory Servicesprovides appraisal, property condition, market studies, feasibilities, underwriting due-diligence, environmental, zoning and telecommunication consulting services to a broad base of local, regional and global clients. It has a professional staff of more than 1,700 appraisers, engineers, architects and environmental scientists in more than 300 major metro areas globally. CBRE was named the leading global valuation services provider in the 2015 Euromoney real estate awards for the fourth year in a row. In addition to the global awards, CBRE was named as the leading real estate advisory firm in North America, Western Europe, Latin America and Africa, as well as the U.S. and 20 other individual countries.

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CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2015 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.