Cap Rates of Self Storage Valuations in Tertiary / C-class Market

[Drew Petro]

Hey guys, thanks for all the great value and knowledge! As we continue to grow our portfolio, I am curious what your thoughts are on current caps rates in tertiary or c-class markets (eg towns about 1-2 hours outside of a city). What are you seeing currently and how do you expect the cap rates to play out over the next 5-10+ years (eg decompression of cap rates).

As we do our underwriting and due diligence on some of these properties, we are seeing cap rates of about 7%-8% (we are in SW Michigan). I am curious if you are seeing the same currently and also how you think the interest rate increase environment over the next handful of years will impact the cap rate (eg could the cap rate decompress to ~10%???) 

We are confident that over the next couple of years there will be some sort of cap rate decompression, but not sure what a realistic magnitude could be. We are focused on purchasing properties that have a ton of value-add potential (eg very low market rents, no technology, web presence, etc) for this reason. I believe that if you buy a stabilized asset now, it will be a painful situation in a couple of years. 

Thanks in advance for all the great insight and opinions!