Self-Storage in the Western States: Real Estate Snapshot
Copyright 2014 by Virgo Publishing.
By: Michael L. McCune
Posted on: 11/10/2009



 
I recently assembled a roundtable of real estate experts to discuss the state of self-storage in the Western United States. I asked them to comment on their local markets and share their predictions for future performance. Joining us in the discussion are: 
  • Richard Arnold, Argus Northwest Real Estate, Hillsboro, Ore.
  • Marc Handley, HRE Inc., Salt Lake City
  • David Laney, RealStar Commercial Real Estate, Albuquerque, N.M.
  • Ryan Layton, American Real Estate Associates, Spokane, Wash.
  • Joan Lucas, Joan Lucas Real Estate Services, Denver
  • Stuart Ripley, Business Team, Roseville, Calif.

1. How are self-storage occupancies holding up in your market? Are owners in your area using rent concessions or new advertising avenues to attract customers?

Arnold: Occupancies in Oregon have held up fairly well, with vacancies ranging between 10 percent and 20 percent. This isn’t substantially greater than it was a year ago. Many owners are offering a full month free after three months of occupancy in lieu of cutting rental rates.

Handley: In Utah and Nevada, we’re definitely seeing a slip in occupancy levels, but owners haven’t been too concerned. There haven’t been many changes in terms of concessions offered, but we’re seeing owners evaluating expenses to cut costs. One of the big areas we’re seeing a reduction in is advertising, especially in the Yellow Pages. Many owners are trying to focus on drive-by advertising and Internet marketing to reduce expenditures.

Laney: In Arizona, the Phoenix market has taken the brunt of the economic downturn, with storage operators competing for few renters in an overbuilt market. Commercial-business rentals have fallen off as small businesses have closed due to the economy.

The Mesa/Tempe markets have experienced loss of occupancy as tenants have either downgraded their unit size or simply moved out. Scottsdale has experienced the least downturn; foreclosures and truck rentals for job relocations have helped buoy that market. The Tucson market is down but stable.

The Colorado River Valley markets have been impacted by a double whammy thanks to a downturn in gambling tourists in the Las Vegas, Laughlin and Los Angeles areas.

New Mexico storage owners have actually benefited from the lower gas prices and the changing economy. There has been either little loss or even a small uptick in rental activity due to job relocations. Several operators mentioned they intend to upgrade their signage or facility appearance and offer incentives.

Layton: Occupancies have remained fairly stable in Washington, especially in the major markets. Some owners who built in the past three or four years are doing creative marketing to get customers, but the stable properties are not conceding on rent. Some are copying Public Storage’s $1 first month or other move-in specials but, overall, most facilities are holding rents firm.

Lucas: We recently co-hosted a dinner with Extra Space Self Storage for 40 self-storage owners and operators in Colorado. It was interesting to learn that the owners in areas with strong demographics seemed to weather the storm better than those in the lower-income areas. One owner said he had more large units available, but all the small units (with higher rates per square foot) were 100 percent occupied. All reported that delinquencies are up, and they’re doing what they can to get new tenants in the property and retain those they have.

Ripley: In North California, facilities that have been established for more than three years are hovering at 75 percent occupancy and better. Some operators are using discounts or free-rent deals to attract new tenants. There has also been an increase in renters who are vacating their class-A office space in favor of more affordable office-warehouse units. 

2. What types of buyers are in your market, large regional and national owners or small, local operators and new owners?

Arnold: Buyers in my market are typically the larger public companies and syndicates, but there are few sellers willing to part with their properties.

Handley: We see buyers of all types in our market, but the majority of transactions belong to small, local or out-of-state operators. National companies will take an interest in the larger facilities if they’re established in the area or if they can acquire multiple assets.

Laney: The buyers in the current marketplace have been the small investors looking for properties $2 million and under. Existing storage owners looking to buy properties in their current markets are also common. The real estate investment trusts don’t appear to be in the acquisitions game right now.

Layton: Small, local operators adding to their portfolio and new owners comprise most of the buyers in Washington. Our cap rates haven’t been driven skyward as in some areas, so many of the large regional buyers are looking elsewhere. Self-storage is one of the most stable investments in Washington since occupancies remain high and barriers to entry are higher, making the state a desirable market for the long-term investor.

Lucas: We have a couple of large development opportunities that, in a normal market, would be excellent investments for any one of the large national operators. That being said, after talking with all of the major players, none are in the market to purchase or develop. We have quite a bit of interest on a listing that has seller financing, but it appears most buyers are still waiting for the bottom of the market before they start to actively purchase facilities.

Ripley: Larger buyers in North California are looking for properties of more than 50,000 square feet, but the greater potential comes from smaller operators seeking to increase their portfolios with properties that have good upside. There’s no development activity in the market, which is reinforced by the lenders’ attitude toward financing new projects.

3. Describe the cap-rate situation in your market. What changes have you seen over the last year?

Handley: We’ve seen a slight increase in cap rates in Nevada and Utah. There are many variables one needs to consider when evaluating a cap rate, including facility size, class and assumable financing with terms not available in today’s market.

Laney: Arizona cap rates are climbing into the 8 percent to 8.5 percent range, though there is quite a disconnect between the sellers and buyers. The area is being canvassed by distressed-property buyers looking for buys in the 10 percent to 11 percent cap-rate range.

The New Mexico market cap rates are in mid-swing, going up to the 10 percent mark, with Albuquerque and Santa Fe markets in the 8.5 percent to 9 percent range and the rest of New Mexico reaching toward the 10 percent mark. Cap rates may eventually get into the 11 percent range depending on the property and particular market.

Layton: In Washington, the average cap rate is 8.75 percent, up from 7.75 percent last year. Owners are struggling with selling for a higher cap rate, since they’re holding solid investments and they don’t want to give away the property. Some of the foreclosed or bankrupt properties have gone for 10-plus percent cap rates, but those are few and far between.

Lucas: Lenders are not interested in what the project can do in the future. They’re only concerned about the past and current performance of the facility, with cap rates based on the trailing income and expenses. I sold a project at an 8.5 percent cap rate last spring. It was an excellent smaller facility with great occupancy. If I was selling it today, it would probably show a 9 percent cap.

Ripley: Nine percent to 9.5 percent is the typical cap rate on offerings in North California. The key question is whether the numbers the seller presents will hold up to scrutiny once the buyers perform their due diligence. 

4. Why should potential investors and current owners buy self-storage today?

Arnold: Potential investors and existing owners of self-storage should increase their holdings now. It’s unlikely the market will get worse than it is, and if they purchase based on today’s net operating incomes, they should look very good when the pendulum swings upward.

Handley: Self-storage is not a recession-proof business, but it’s close. These assets are sound vs. the other sectors of real estate that are struggling. Even though we’ve seen an increase of self-storage delinquencies and auctions, there’s been a minimal impact on the returns. There’s always another tenant needing a unit and a need for self-storage in virtually any market condition. This makes self-storage a solid investment choice.

Laney: Although there’s some stress in the market, an overwhelming number of operators are anticipating things will get better and seeing improvement in the last three months of rental activity. Most operators in Arizona and New Mexico report cash flow in the positive direction. The current market has encouraged storage businesses to clean up their facilities and offer discounts or more service to be prepared when the economy does turn around. Self-storage is in the least distressed condition when compared to small retail strips and office buildings.

Layton: Self-storage has been a well-kept secret for many real estate investors, and only recently has the secret gotten out. Local owners know they have a good thing going. and the national operators have REITs drooling over self-storage. In these uneasy and unforgiving times, self-storage is a stable, self-sustaining, quality asset that provides solid monthly cash flow year in and year out. If you’re looking for a real estate investment to make your portfolio turn from red to black, consider self-storage.

Lucas: Self-storage has the reputation of being somewhat recession-proof, and this has held true in the current economic downturn. As depressed as the world economy is, self-storage projects are holding their own. With good attention to management and marketing, there’s no reason self-storage won’t continue to be an asset class that outperforms others.

Ripley: Virtually every other type of real estate is now suffering the effects of the economic downturn. Office buildings and all types of commercial/retail properties are seeing an increase in foreclosures. Self-storage, on the other hand, has avoided the same decline, and the vast majority of the businesses are continuing successfully. There may have been some small adjustments with current occupancy vs. a year ago, but self-storage still remains one of the most stable investment options in today’s market.

Michael L. McCune is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self-storage buyers and sellers and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE.

Related Articles:

Self-Storage in the South-Central States: Real Estate Snapshot

The State of Self-Storage: Industry Report 2009

Self-Storage in the Western States: Real Estate Snapshot [December 2008]