SELF-STORAGE REPORT VIEWPOINT 2017 / COMMERCIAL REAL ESTATE TRENDS. By: Steven J. Johnson, MAI, Senior Managing Director, IRR-Metro LA. irr.

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1 SELF-STORAGE REPORT VIEWPOINT 2017 / COMMERCIAL REAL ESTATE TRENDS By: Steven J. Johnson, MAI, Senior Managing Director, IRR-Metro LA The Self Storage Story The self-storage sector has been enjoying solid growth since the end of the recession. As self-storage success goes hand-in-hand with that of residential growth, the boom in both apartment and single-family housing demand has led to more need for and more demand of self-storage units. This past year, 2016, was a banner year for the industry, with two of the largest portfolio transactions, totaling close to $3 billion combined, taking place. An Integra Realty Resources Publication irr.com

2 Demand Still Strong; But Occupancy Stabilizing The self-storage industry enjoyed 366 days of very strong performance in Two of the largest portfolio transactions ($1.3 billion and $1.4 billion) of the past decade took place in 2016, at historically low capitalization rates. As predicted in the IRR 2016 Self-Storage Viewpoint report, occupancy and revenue trended upward. The underlying fundamentals will remain steady for the sector in 2017, with occupancy and rent growth beginning to stabilize. Investors and owners will be able to boost revenue by pushing rents, rather than increasing occupancy. Additionally, investors will increasingly seek out the value-add opportunities by acquiring self-storage properties at a lower cost, then investing in physical and operational upgrades to increase both rent and asset value. Overall, performance will continue to increase, with investors liking the yield and revenue this asset class produces. One issue to keep an eye on, however, is that of increasing supply. Additional units coming to the market in this highly-fragmented sector could mean some locations might experience occupancy and rent fall-off. Additionally, the latest market data supports IRR s hypothesis from last year that the market would begin to moderate in the latter part of After several years of historic growth, rental rates and occupancy are showing signs of stabilization, after gaining back losses from the Great Recession. The data implies still very strong, but slightly slower revenue growth in Growth will be based on more normalized rent increases rather than a combination of rent increases and occupancy growth. As the self-storage sector goes hand-in-hand with the residential markets, the boom in the multifamily sector, while slowing, is still robust, with renters continuing to seek out viable apartment units. Meanwhile, construction is on the rise for single-family properties, signaling an increase among the population for home ownership while interest rates still remain low. 2

3 2017 VIEWPOINT SELF-STORAGE REPORT / INTEGRA REALTY RESOURCES 15% of national inventory is owned by REITS REIT Performance The self-storage sector is highly fragmented, with REITs owning only 15% of the national inventory. The remaining self-storage assets are either mom-and-pop operations, or owned by small, private groups. The greatest occupancy growth among REIT-owned storage assets occurred in , and has been tapering off, ever so slightly each year since. It was not until 3Q 2016 that occupancy growth became nearly stagnant. Revenue growth had been sluggish, with expenses increasing by 1.6%. Combining the impact of rental growth and slow expense growth allowed net operating income (NOI) to increase by a healthy 7.0%. The self-storage market has officially reached a point of stabilization after a slow and very lucrative lease up of lost ground after the recession. This does not mean that the party is over by any means. It does, however, appear to be a possible turning point. An anticipated increase in supply, together with rising interest rates, could result in a deceleration for the self-storage sector. Now that occupancy appears to have plateaued, revenue is anticipated to follow a similar trend and become more normalized. Most tenants receive rent increases of at least 3% to 6% annually. Normal rental rate increases will represent the only revenue growth, with no help from increasing occupancy. The development pace appears to be quickening as investors market-wide are recognizing the stability and growth of self-storage revenue in recent years. The self-storage industry appears to have reached a mature portion of its cycle, is growing, and appears to be showing signs of changing from red-hot to slightly less than red-hot. The following is a comparison of the 2012 through 3Q 2016 performance of the four self-storage REITS: Public Storage, Extra Space Storage, Life Storage (Sovran), and Cube Smart. AGGREGATE REIT PERFORMANCE - SAME STORE OPERATION* Period Facility Count Occupancy Revenue Expense NOI 3Q , % 5.5% 1/6% 6.9% , % 7.3% 2.4% 9.5% , % 6.9% 3.0% 8.7% , % 7.5% 2.8% 9.8% , % 6.0% -1.4% 9.6% *Public Storage, Extra Space, Sovran, & CubeSmart 3

4 Rental Rates REITs tend to lead market trends due to their efficiencies, but they own only 15% of the national self-storage inventory. However, a look at Reis data, which covers the self-storage REITs, can help provide insights into this industry. Rental rates increased from 3Q Q 2016, according to REIS metrics. However, the percentage growth decreased, when compared to the period 3Q Q 2015, providing additional evidence of a more normalized market. Rents for non-climate controlled space increased 12.9% since 1Q 2013, and 3.5% in the past 12 months. Climate-controlled asking rents rose by 11.7% from 1Q 2013, and 2.0% in the past year. The average pace of asking rate increase per quarter is 0.9% for both nonclimate and climate-controlled space. Cap Rate Trends Nationwide, the underlying fundamentals of self-storage remain very strong. Recent transactions imply self-storage capitalization rates, of all class types, are averaging between 6.0% to 6.25% nationally, with Class A facilities in the low 5% range. Some transactions came in with cap rates below 5%, which were never seen prior to Many of these transactions involved some of the best assets in the strongest markets, assets that rarely are put up for sale. Other transactions with lower cap rates had good upside, indicating much higher rates on a goingforward basis. Many in the industry agree that there is bifurcation in overall rates, depending on the asset class. IRR interviews with owners/operators, buyers, brokers, and mortgage brokers, showed that an acceptable cap rate range for self-storage properties nationwide could be as follows: Class A 4.75% % (Non Class A value-add deals have been seen under 5% in some areas) Class B 5.75% % (depending on location and amount of perceived upside potential by investors) Class C 7.25% + Additionally, market participants interviewed by IRR do not think gradual increases in cap rates of 25 basis points (bps) throughout 2017 will have a negative impact on the sector. Anticipated revenue growth is believed to outpace any detrimental impact on value because of increasing overall rates due to a slow increase in interest rates Projections Capitalization rates are expected to remain low, given that interest rates, when they rise, are expected to rise slowly. A stabilization of capitalization rates is anticipated in 2017, and already appears to be evident in the latter portions of Performance will continue trending upward, though at a slower pace than the past year. Most facilities will experience a very strong start in 2017, as they operated throughout the previous year with low vacancy. This means owners and investors can continue pushing rental rates. The amount of new product being delivered to market is increasing, and in 2017, will surpass that completed in Investors will search for value-add deals, or those that are under-performing due to below average marketing /management. The industry continues to be driven by technology, with facilities falling behind becoming targets for valueadd investors. 4

5 Comprehensive Commercial Real Estate Market Research, Valuation and Advisory Services About IRR Integra Realty Resources (IRR) is the largest independent commercial real estate valuation and consulting firm in North America, with over 195 MAI-designated members of the Appraisal Institute among over 600 professionals based in our 51 offices throughout the United States and the Caribbean. Founded in 1999, the firm specializes in real estate appraisals, feasibility and market studies, expert testimony, and related property consulting services across all local and national markets. Our valuation and counseling services span all commercial property types and locations, from individual properties to large portfolio assignments. About Viewpoint IRR s Viewpoint represents the compilation and presentation of Commercial Real Estate (CRE) rates, market conditions, and forecast data. The rates, market conditions, and forecast data is generated via IRR s Viewpoint Survey. IRR s Viewpoint Survey requests market experts consisting of Appraisers and Consultants, each of whom have deep CRE expertise, to provide insights on over 60 U.S. markets. Viewpoint data is collected across five asset classes including Multifamily, Office, Retail, Industrial, and Hospitality. Viewpoint s rates data (Cap Rates, Discount Rates, Reversion Rates, Vacancy Rates, etc.) reflects an expert s opinion based on recent market activity experienced in the past 6 months. Viewpoint forecast data represents a 12-month outlook based on current market conditions. The data in Viewpoint reflects rates data and forecasts based on stabilized properties in the respective U.S. marketplace. Where referenced, all regional and national averages are based on simple average calculations and are not weighted. IRR s Viewpoint Survey is conducted through a proprietary data survey tool, and all data is checked both manually and by a specially designed computer editing procedure. While we do not guarantee that the survey is statistically accurate, the Viewpoint data provides, what we believe, is the best, clear-sighted insights into the CRE marketplace. Sources Written By: Steven J. Johnson, MAI, Senior Managing Director, IRR-Metro LA Aggregate REIT Performances - Same Store Operations Sources: Companies Public Securities Filings Integra Realty Resources, Inc S. Colorado Boulevard Suite Denver, CO irr.com This publication includes analyses and opinions provided by third parties, and while the available data is presumed to be accurate, no representation or warranty is made regarding the accuracy of the information contained in this publication. This publication does not render legal, accounting, appraisal, counseling, investment or other professional advice. Should such services or other expert assistance be needed, it is recommended that the services of a competent person or firm, having access to the details of the situation, be employed.