KORPACZ REAL ESTATE INVESTOR SURVEY®

Fourth Quarter 2006

Making News This Quarter National Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Useful Websites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Property & Geographic Preferences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Valuation Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Technology News & Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Economic News . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Real Estate Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Domestic Self-Storage Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 FOURTH QUARTER 2006 VOLUME 19 NUMBER 4

COMMERCIAL MARKET REPORTS National Retail Markets Regional Mall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Power Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Strip Shopping Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Office Markets National CBD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 National Suburban . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Houston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Los Angeles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Manhattan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Pacific Northwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Philadelphia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 San Francisco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Southeast Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Washington, DC Metro The District . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 Northern Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 Suburban Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

National Flex/R&D Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 National Warehouse Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 National Apartment Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 National Net Lease Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 National Developement Land (semiannual) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 Investor Survey Response Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Investment and Property Market Characteristics Office Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 National Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65

Yield Comparisons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Dividend Comparisons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Institutional-Grade vs. Noninstitutional-Grade Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Income Capitalized in Direct Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68 Holding Periods and Growth Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70 Industry News . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72 "Reprinted with permission from PricewaterhouseCoopers LLP; for more information about this Survey, please call 201-689-3130."

10

Domestic Self-Storage Market PRICING AND PERFORMANCE TRENDS – 2ND HALF 2006 By Charles Ray Wilson, CRE, MAI Self Storage Data Services, Inc.

A

achieving economic occupancy levels

SOFTENING HOUSING MARKET AND

The high cost of new development

CONCERNS ABOUT THE SLOWING PERFOR-

has helped keep the pace of new con-

MANCE OF THE U.S. ECONOMY FAILED TO

struction to a minimum. Based on data

DAMPEN TENANT DEMAND IN THE DOMES-

from F. W. Dodge and other sources,

CLASSIFYING SELF-STORAGE FACILITIES

TIC SELF-STORAGE MARKET DURING THE

the number of new starts has been sta-

Today’s investors, lenders, and appraisers

SECOND HALF OF 2006. After

of 70.0% and in a few cases 60.0%.

self-storage

ble and is not a threat to the self-storage

are finding it increasingly important to

REITs gained national attention by out-

industry's overall health. Nevertheless,

differentiate between the quality of facil-

performing the S&P 500 and the Morgan

there are a few submarkets where

ities and their locations when measur-

Stanley REIT Index in terms of total re-

heavy amounts of new construction

ing risk. It has become evident that some

turns in 2005, the four self-storage

have occurred. As a result, these sub-

recent acquisitions have resulted in in-

REITs, along with the rest of the self-

markets now have facilities that have

vestors paying Class-A prices for facili-

storage industry, posted solid operating

been slow to stabilize. In such markets,

ties that are either less than Class-A

results in the third quarter of 2006.

some properties have had difficulty

quality or situated in less than Class-A locations. The following characteristics of

Ta b l e 1

Class-A, Class-B, and Class-C facilities

D O M E S T I C S E L F - S T O R AG E M A R K E T Second Half 2006 DISCOUNT RATE (IRR)a Range

were recognized in a recent Self Storage Data Services (SSDS) survey of in-

SECOND HALF 2006

FIRST HALF 2006

9.00%–10.75%

8.50%–10.50%

dustry participants. Class-A facilities have excellent

9.75%

9.75%

locations and access in order to attract

—

0

tenants willing to pay rents in the upper

6.50%–9.00%

6.00%–8.75%

ities have superior construction and fin-

7.65%

7.40%

ishes, are relatively new (or competitive

Change (Basis Points)

—

+25

with new facilities), and provide profes-

RESIDUAL CAP RATE Range

7.25%–10.00%

7.25%–9.50%

8.75%

8.50%

—

+25

2.50%–5.00%

2.50%–5.00%

maintenance, above-average access

3.50%

3.50%

and security, and usually offer some cli-

—

0

2.75%–5.00%

2.75%–5.00%

3.75%

3.75%

—

0

4.00–9.00

4.00–9.00

Class-A facilities, but above Class-C fa-

8.00

7.00

cilities. They receive average to good

+14.29

maintenance and have a full-time, on-

Average Change (Basis Points)

quartile in the marketplace. These facil-

a

OVERALL CAP RATE (OAR) Range Average

Average Change (Basis Points) MARKET RENT CHANGE RATE b Range Average Change (Basis Points) EXPENSE CHANGE RATE b Range Average Change (Basis Points) AVERAGE MARKETING TIMEc Range Average % Change a. Rate on unleveraged, all-cash transactions

Source: Self Storage Data Services, Inc.

sional on-site and off-site management. Class-A facilities are typically located in markets with high barriers to entry. They are characterized by above-average

mate-controlled units. Class-B facilities have average loca-

— b. Initial rate of change

c. In months

tions, access, and visibility. They compete at the low end of the Class-A facility range and achieve rental rates below

site manager and competent off-site management. The quality of construction, ac-

"Reprinted with permission from PricewaterhouseCoopers LLP; for more information about this Survey, please call 201-689-3130." P R I C E WAT E R H O U S E C O O P E R S

w w w. p w c r e v a l . c o m

11

cess, and security ranges from average

■ A facility must exhibit more than one,

compared to the frenzied pace of the

to good.

but not all, of the above characteristics in

last couple of years. While there has

order to be considered under a specific

been a slow down in the pace of acqui-

classification.

sitions from both private and public

Class-C facilities have secondary, less desirable locations relative to tenant needs. These facilities often have poor

operators, there are one or two opera-

access and limited visibility. They are typ-

INVESTMENT MARKET CONDITIONS

tors who continue to pay top dollar in

ically older facilities with growing func-

There are some institutional and private

order to bulk up their portfolios in the

tional and/or economic obsolescence.

investors new to the industry that are

hope of "going public."

They achieve rents at the bottom of the

looking for solid investment opportuni-

In addition to a slowdown in the

range in the marketplace. These facili-

ties. While the market is nearly void of

pace of transactions, the industry is ex-

ties are often owned and operated by

Class-A stabilized facilities available for

periencing a bifurcation in investment

individuals and may not have an on-site

purchase, the transition from a sellers'

parameters as investors recognize the

manager. The quality of construction

market to a buyers' market continues as

obvious differences in risk among com-

and maintenance ranges from fair to

REITs and other major investors have

peting classes of self-storage facilities

average. Many of these facilities have

backed off from their aggressive acqui-

(see Table 2).

either minimal or no security and re-

sition modes prevalent during the first

ceive below-average maintenance.

half of this year. Interestingly, many self-

CLASS-A FACILITIES

These characterizations are intend-

storage investors who recently acquired

With very few stabilized Class-A facili-

ed as a guide and should have the fol-

facilities are now focused on figuring out

ties on the market today and an abun-

lowing caveats:

ways to achieve their anticipated yields

dance of capital looking to invest in

through operations.

Class-A facilities, cap rates are not like-

■ The final designation of Class A, B, or

ly to increase significantly for Class-A

C is always relative to the local market or

OVERALL CAPITALIZATION RATES

product anytime soon. Furthermore,

submarket being analyzed. The attributes

Overall capitalization rate trends for all

strong operating performances by Class-

of class may be different in a central bus-

self-storage facility transactions from the

A properties should keep cap rates from

iness district versus a suburban market.

first quarter of 2003 to the third quarter

rising too high too soon.

of 2006 are shown in Chart 1. The rates ■ The primary considerations for classi-

are weighted toward Class-A facilities

CLASS-B AND CLASS-C FACILITIES

fying a property are listed above. How-

and do not reflect facility transactions in

The forces that drove Class-B and Class-

ever other variables worthy of consider-

either nonurban or rural areas.

C cap rates down over the past few years

ation may be age, architecture, parking,

The self-storage industry is starting to

have changed. The cost of acquisition

ancillary uses, construction material, etc.

see more rational investment behavior

capital has increased, but capital is still

Chart 1

OV E R A L L CA P I TA L I Z AT I O N R AT E T R E N D S Includes Both Portfolio and Individual Facility Sales 9.00% 8.50%

8.00% 7.50%

3Q06

1Q06

3Q05

1Q05

3Q04

1Q04

3Q03

1Q03

7.00%

Source: Self Storage Data Services, Inc.

"Reprinted with permission from PricewaterhouseCoopers LLP; for more information about this Survey, please call 201-689-3130." FOURTH QUARTER 2006

KO R PAC Z R E A L E S TAT E I N V E S TO R S U R V E Y

12 Ta b l e 2

reached 106.7, up 7.8% from the same

OVERALL CAPITALIZATION RATES BY CLASSIFICATION

period a year earlier (see Chart 2). As the

Minimum 6.50%

Class-A Self-Storage Maximum 7.50%

Average 7.10%

Minimum 7.50%

Class-B and Class-C Self-Storage Maximum 9.00%

Average 8.30%

SSPI illustrates, the self-storage industry has felt little negative impact due to the downturn in the housing market or to concerns over the stability of the U.S. economy.

Source: Self Storage Data Services, Inc.

PERFORMANCE AT A GLANCE plentiful. 1031-exchange buyers (high-

are not achieving their anticipated finan-

ASKING RENTAL RATES

net-worth investors) and the two com-

cial objectives and the developers are

On a seasonally adjusted basis, the med-

panies that most recently went public

looking to make their partners whole by

ian asking rental rate nationwide in-

(Extra Space and U-Store-It) have be-

shortening investment holding periods.

creased 4.7% in the third quarter of

come more targeted in their acquisition

As a result, pricing and cap rates for

2006, representing a nearly 1.0% in-

focus. In addition, more facilities in this

these facilities are indicative of "unsta-

crease over the 4.0% seasonally adjust-

classification are being offered for sale.

bilized" assets.

ed increase in the prior quarter (see Table 3).

Individual owners who have waited to sell are now offering their properties for

SELF-STORAGE PERFORMANCE INDEX

sale; some are going directly to investors

The softening housing market and con-

tion in operating performance due to

rather than through brokers.

cerns over the direction of the economy

varying levels of asking rental rates.

Cap rates for all self-storage classifi-

failed to slow tenant demand for stor-

While the South still demonstrated the

cations are being impacted by the facil-

age space in the third quarter of 2006.

strongest performance (as it typically has

ities developed within the past three

Self-storage fundamentals continued to

time and time again), Texas, and not

years. Some developers were caught off

improve as owners pushed up asking

Florida, was the national leader. On the

guard by the dramatic rise in construc-

rental rates, physical occupancies in-

other hand, the Midwest saw a nearly

tion costs, by longer than expected con-

creased, and fewer facilities offered con-

4.0% decline in median asking rental

struction periods, and in a growing num-

cessions.

rates due to soft market conditions in

©

The Self-Storage Performance Index

ber of neighborhoods, by slower than anticipated absorption. These facilities

Markets demonstrated a wide varia-

©

(SSPI) for the third quarter of 2006

major markets like St. Louis, Kansas City, and Milwaukee.

Chart 2

SELF-STORAGE PERFORMANCE INDEX (SSPI) ©

115 110

106.7

Index

105

99.0

100 95 90 85

04 1Q

04 2Q

04 3Q

04 4Q

05 1Q

05 2Q

05 3Q

05 4Q

06 1Q

06 2Q

06 3Q

Base: 4th Quarter 2003 = 100 Source: Self Storage Data Services, Inc.

"Reprinted with permission from PricewaterhouseCoopers LLP; for more information about this Survey, please call 201-689-3130." P R I C E WAT E R H O U S E C O O P E R S

w w w. p w c r e v a l . c o m

13 Ta b l e 3

P E R F O R M A N C E AT A G L A N C E Top 50 MSAs QUARTERLY

SEASONALLY

ANNUALLY

3Q06 vs. 2Q06

3Q06 vs. 3Q05

Trailing 4 Quarters

MEDIAN ASKING RENTAL RATE CHANGE

Down 1.1%

Up 4.7%

Up 1.1%

MEDIAN PHYSICAL UNIT OCCUPANCY CHANGE RATE

Down 1.6%

Up 1.7%

Up 0.4%

REVENUE PER OCCUPIED UNIT CHANGE

No Change

Up 8.6%

Up 2.0%

Source: Self Storage Data Services, Inc.

PHYSICAL UNIT OCCUPANCY

4.0% (over 11% in some areas) and phys-

construction, new construction can be

Median physical unit occupancy in-

ical occupancy remaining flat at 90.0%,

justified even in markets with high bar-

creased nearly 2.0% in the third quarter

rental income per occupied square foot

riers to entry given the premium being

of 2006, a 1.7% increase over the same

declined 2.0% after considering the im-

paid for Class-A facilities and the con-

period last year. The Midwest remained

pact of concessions. This declining trend

tinued strength of tenant demand.

level at 90.0%, while the balance of the

in rent per occupied square foot is reg-

Operationally, self-storage is poised to

country generally posted increases of

ional in scope and started in the first

benefit from the disruption caused by a

between 1.0% and 2.0% during that

quarter of 2006.

slowing housing market and the chang-

time. While Florida’s occupancy re-

ing economy, so long as there is not a

mained level at 93.0%, Texas experi-

KEY INDICATORS

major recession or other similar global

enced a 5.0% gain in physical unit

As shown in Table 1, the average dis-

event.

occupancy, increasing from 85.0% to

count rate for the self-storage industry

90.0%.

remained the same, while the average

Note: The Self Storage Performance

overall cap rate increased 25 basis

Index© (SSPI) and other products refer-

CONCESSIONS

points. For the second half of 2006, the

enced herein are either copyrighted or

The continued decline in the number of

average discount rate was 9.75%, while

trademarks

facilities offering concessions is further

the average cap rate was 7.65%. Average

Services, Inc. (SSDS) and are reprinted

evidence that the industry remains

marketing time also increased during the

herein with SSDS’s permission.

strong in the face of a softening housing

second half of 2006, reflecting a less har-

market and an uncertain economy. The

ried acquisition pace.

number of facilities offering conces-

of

Self

Storage

Data

Charles Ray Wilson, CRE, MAI is the founder of Charles R. Wilson &

sions has declined six out of the last

CONCLUSION

Associates, Inc., a full-service apprais-

seven quarters. Today, 27.0% fewer

Self-storage fundamentals remain strong

al firm that specializes in the valuation

facilities offer concessions compared to

in most markets but performance is be-

of self-storage facilities nationwide,

the fourth quarter of 2004.

coming more and more submarket spe-

and the founder of Self Storage Data

cific. We can no longer generalize about

Services, Inc., a leading manager and

RENT PER OCCUPIED SQUARE FOOT

the industry's performance anymore

publisher of economic and operating

Nationwide, rent per occupied square

than we can generalize about other real

statistics relating to the self-storage

foot increased over 8.5% during the third

estate sectors. Like other real estate sec-

industry. For more information about

quarter of 2006 compared to the same

tors, however, fewer deals are being

SSDS please visit their website at

quarter last year. However, in the Mid-

done today as the bid-ask spread

www.ssdata.net. More information

west it was a different story. With asking

widens. Even though soaring develop-

about Charles R. Wilson & Associates,

rental rates having declined nearly

ment costs have kept the lid on new

Inc. can be found at www.crw.com. ✦

"Reprinted with permission from PricewaterhouseCoopers LLP; for more information about this Survey, please call 201-689-3130." FOURTH QUARTER 2006

KO R PAC Z R E A L E S TAT E I N V E S TO R S U R V E Y