For this Field Note, we wanted to share some observations on the current transaction market and where cap rates appear to be settling after the volatility of the past few years.
Over the last 24 months, higher interest rates and reduced lending availability slowed transaction volume across most real estate sectors, including self-storage and light industrial. During that period, pricing became difficult to read because fewer assets were trading, and buyers and sellers often had very different expectations of value.
More recently, we have started to see more consistency in the market. While transaction volume is still below the peak years, deals are getting done, and cap rates are beginning to reflect the higher cost of capital that buyers are facing today.
For high-quality self-storage in strong suburban locations, current cap rates generally appear to be modestly higher than where they were during the low-rate environment, but not dramatically so. In many cases, the bigger change has been in underwriting assumptions. Buyers are looking more closely at lease-up risk, rate sustainability, operating expenses, and the amount of new supply in the submarket.
From our perspective, this environment tends to favor projects that were developed with a reasonable basis rather than assets that were acquired at very aggressive pricing. Because most of our properties were built rather than purchased, our cost basis is often lower than current replacement cost, which provides more flexibility whether we choose to hold or sell.
We are also seeing that well-located suburban assets continue to attract strong interest, even in a slower market. Buyers remain focused on areas with population growth, limited competing supply, and long-term demand drivers. Properties in those locations may take longer to trade than they did a few years ago, but they are still clearing the market at solid values.
Another dynamic we are watching closely is the relationship between cap rates and interest rates. While borrowing costs increased quickly, cap rates have moved more gradually, which has compressed buyer returns in the short term. Over time, markets tend to adjust, either through lower pricing, higher NOI, or some combination of both. We are beginning to see that adjustment take place, although it is happening slowly.
For our portfolio, the current environment reinforces the benefit of staying patient. We do not feel pressure to sell assets in a thin market, and in many cases continued rent growth and stabilization can create more value than an immediate disposition. At the same time, we are starting to see opportunities where new deals can be structured at more attractive pricing than was possible a few years ago.
As with every cycle, the goal is not to predict the exact timing of the market, but to maintain discipline so that we are positioned well regardless of where cap rates move next.
