A Self-Storage Outlook

R.K. Kliebenstein Comments
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The Fabulous San Francisco Bay Area

By R.K. Kliebenstein

The San Francisco Bay is 50 miles long, from three to 13 miles wide, and is entered through the Golden Gate, a strait between two peninsulas. The city is on the southern peninsula, while on the northern peninsula are the residential suburbs of Marin County. On the eastern shore of the crescent-shaped bay are such industrial cities as Alameda, Oakland, Berkeley and Richmond. The Santa Clara Valley, part of a great depression parallel to the coast, is the landward extension of the bay. Angel Island, Alcatraz and Yerba Buena Island are in the bay itself.

The San Francisco Peninsula not only holds the city, but also some of the oldest and most elite suburbs of the Bay Area. These suburbs, including Silicon Valley and San Jose, can be found to the south of the city. Attractions of the area include The Cannery, Pier 39 and the Santa Cruz Beach Boardwalk.

A drive across the Bay Bridge to East Bay will take you to the lively towns of Oakland and Berkeley. Even though 30 years have passed since the political uprising, Berkeley still remains the national symbol of political and social activism and, most important, it still upholds its idealistic spirit.

The pure, unspoiled beauty of the coast of Marin County greets the visitor who ventures across the famous Golden Gate Bridge. Besides the natural splendor of the mountains, Redwood forests and the ocean, there are also some affluent suburbs in the county, such as Sausalito. Marin offers attractions such as the Point Reyes National Seashore and Muir Woods wilderness.

The scenic wonders may lure some, but the tranquility of the wine-growing regions of the Napa Valley attract many. Within an hour's drive from San Francisco, the prestigious wineries of the valley offer unique opportunities to taste wines of superb quality and dine in even finer restaurants. The Silverado Trail that passes through the Napa Valley provides an ideal view of the scenery of the wine country. The Sonoma Valley affords a break from city life with its rural, informal atmosphere.

The Bay Area is at the cutting edge of the emerging global-information economy, and is a leader in key indicators of success, including:

  • The highest percentage of fastest-growing small businesses in the country;
  • The highest concentration in the nation of people with college and advanced degrees;
  • More than double the average number of patents per employee;
  • The highest concentration in the nation of high-tech exports;
  • The largest concentration in the nation of major national-research universities and federal-research laboratories;
  • The highest Internet penetration of any U.S. region;
  • The highest density of venture-capital firms in the world, and the highest concentration of invested venture capital (35 percent of the U.S. total); and
  • A gross regional product of more than $200 billion annually.

This vibrant tourist area is also the home to one of the largest population centers in the United States. Self-storage is no less important in the Bay Area than in any major U.S. metropolitan area. With a population of more than 6 million, this is one of the major U.S. self-storage markets.

A Self-Storage Outlook

Bill Kenney is an attorney who has been involved in developing real estate for about 25 years and self-storage for almost 20 years. Kenney owns and manages facilities in the San Francisco Bay Area. He has been president of the national Self Storage Association as well as its Western region division, and has participated in numerous conferences and panels regarding storage matters. He tells us:

The Northern California storage market continues to be very strong. The exploding growth in the San Francisco Bay Area led by Silicon Valley and Silicon Gulch, continue to cause the multiplication of new businesses. These growth industries have also generated a strong increase in population. Office rental prices have been driven up by these new businesses.

The recent downturn in dot-com companies has caused a slight downturn in the office-rental rates in the major markets, but the release rate has been good. Large companies such as Cisco, Intel, Oracle and others continue to expand their office space. Office rents in the Bay Area are now among the highest in the world. This makes the alternative of storage very attractive. The office-rental rates have also resulted in some existing storage facilities being sold to groups wishing to build offices.

Residential home prices and rental rates have also increased. The median price of homes continues to rise. This has put pressure on all land prices, making entry into the storage business more expensive. However, the higher land prices call for more density and smaller homes. The people in the smaller houses need storage. These prices also have resulted in people commuting from outlying areas to the core Bay Area business areas. Many people drive two or more hours per day to work. This has caused an increase in the growth of areas outside the immediate Bay Area. There has been growth to the south in Morgan Hill, Gilroy and Salinas, to the north in Santa Rosa and Windsor (though the Santa Rosa area has become saturated) and to the east in the Brentwood, Antioch and Sacramento areas.

The California energy crisis is now looming for the state, but it appears it will be of minimal impact to storage operations because of the low use by facilities of natural gas, where the major price increases are occurring. It still will be a factor.

Government has become more sensitive to storage issues, and some communities have placed moratoriums on new storage construction. This is beneficial to existing owners in those communities by making entry into the business more difficult and expensive.

The demand for participation in storage property in the form of investments is very strong as more people have become familiar with the industry and the potential returns. This has helped as far as sales of existing facilities are concerned, with sales going at very good capitalization rates.

The Pegasus Group, which currently owns and operates more than 50 facilities throughout the United States, is headquartered in the Bay Area. Pegasus General Partner Dwight Davis affirms Bill Kenney's comments:

The San Francisco Bay Area has been one of the hottest self-storage markets in the United States in the last three years. Occupancies tend to be high and rents average well above $1 per foot. Obviously, with high rents and high occupancies, there has been significant self-storage development in and around the Bay Area. Some markets are beginning to reach saturation. Examples of markets that are becoming saturated include Walnut Creek--with several new projects recently opened and several large ones under construction--Concord, Tracy, Santa Rosa and, perhaps to a lesser extent, San Jose. Markets that are underserved include San Francisco proper, the San Francisco Peninsula south to Palo Alto, and the San Ramon Valley from Danville to Pleasanton.

Land costs have accelerated in the last 24 months. Two years ago, land was available at $5 to $12 per square foot. Today, land ranges from $12 to more than $100 per square foot. In most cities in the San Francisco Bay Area, entitlements will be difficult. You can expect from six to 18 months to complete the entitlement process. Fees and requirements by local planning agencies may add $3 to $10 per square foot to your overall costs. Then, there is the matter of off-site improvements: signalization, street widening, curbs, gutters and street lights are a few of the additional costs developers face.

With all the negative information, though, there still seems to be an abundance of developers proposing deals in the San Francisco area. Currently, there are approximately 50 new storage projects in the planning or development stages in the San Francisco Bay Area and another 50 that have opened in the last 12 months. As in any market, there are always good submarkets. Developers should continue to be aware of overbuilding and make their development choices wisely.

Carl Touhey, a local broker specializing in self-storage sales, has had very few new opportunities for the purchase of existing properties as sellers were holding the investments and not selling. Projects that were of "B" and "C" class two years ago are now either sold or under contract as buyers have acquired whatever seemed to be available.

I recall looking at acquisitions in the Fremont area two years ago, and while the market seemed at that time to have vacancies and new projects coming on-board, even those properties have leased up and are doing well. Cap rates are very tight in the market for existing acquisitions, and properties still experience a frenzy of activity when they become available. All this is just an example of how good the self-storage business is in this market.

R.K. Kliebenstein is a consultant with Coast-To-Coast Storage, which provides feasibility studies, acquisition and due-diligence services, as well as financing for self-storage projects on a nationwide basis. He can be reached at his South Florida home office at 561.367.9241.

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