THE SOUTHWEST

Michael L. McCune Comments
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This month's travels take us to the great Southwest, which has been a traditionally strong area for self-storage operators. Let's hear what our local experts have to say about their respective cities and regions. Our Southwest brokers join us in this survey: Mark Keys (Cornerstone Realty, San Antonio); Joan Lucas (Joan Lucas Real Estate Services, Denver); Richard Minker and Tyler Trahant (Richard D. Minker Co., Fort Worth, Texas); and Chuck Witters (Lee & Associates, Las Vegas).

1. Have you seen the impact of a recession in your area yet?

Keys: Some signs of economic slowdown are appearing in Texas. Dell Computers has laid off 5,700 people in Austin this year. It may be too early to tell, but so far, it does not appear the self- storage market is feeling the impact of a downturn.

Lucas: Housing prices are dropping, apartment vacancies are increasing and, for the first time in years, the office market in Denver is experiencing very high vacancies. However, we have not seen a slowdown as far as the interest in acquiring well-located self-storage projects.

Minker: From a leasing standpoint, we have seen some companies pulling in the reins, but as of yet self-storage seems unaffected.

Witters: In Las Vegas, have seen the results of the recession but more so the results of Sept. 11. About 50 percent of our tourists fly into the city. Since people have been somewhat afraid to fly, we have had a fairly significant reduction in hotel/casino room occupancy. We are now up to about 70 percent for the 120,000-plus rooms in Las Vegas, but we normally have a 90 percent-plus occupancy rate. This has caused temporary layoffs by the hotel/casino industry, which flows throughout the Las Vegas community. The hotels have lowered room rates and some airlines have reduced rates, which is assisting in getting people to fly to Las Vegas again. Some smaller conventions were cancelled immediately after Sept. 11, but the larger ones are still on. Las Vegas has a history of being the last city into a recession and the first out.

2. Are investors still interested in self-storage and, if so, what kind of investors are they?

Keys: We are seeing continued interest from both private and institutional investors. Many investors feel self-storage facilities represent a relatively safe haven during times of economic downturn.

Lucas: The people we are working with, for the most part, are individual investors or owners that already own 10 to 15 self-storage projects.

Minker: I think more and more self-storage investors are going to be first-time buyers looking to take what money they have out of the stock market and put it in a more stable investment--real estate.

Witters: Yes, investors are still interested in storage. They are mainly investors looking for solid leased investments rather than purchasing the land to build their own self-storage. They look to Las Vegas due to our great influx of residential business over the past 10 years.

3. Are the local banks continuing to make loans in your area? Are the falling rates having any impact on buyers?

Keys: Local banks are making loans on self-storage facilities in our area, albeit at terms that are less favorable than conduit loans. I'm seeing local banks quote borrowers floating rates of one to two points over prime, and they're typically willing to loan 70 percent of appraised value on a 15-year amortization with a five- to seven-year balloon.

Lucas: Yes, the lenders that "play" in our market continue to have a presence, at least for now. Hopefully, the falling rates will have the same impact on self-storage buyers as they do on residential purchasers, making them take a hard look at investments.

Minker: Banks in the area are still willing to finance self-storage projects as long as the market is competitive and the buyer is sound.

Witters: Yes, the local banks are continuing to make loans. We have seen only a slight slowdown of lending in the Las Vegas valley. They are doing more due diligence to ensure the safety of their loans, but the money is available.

4. Are you seeing any signs of overbuilding? Is it really a big deal in the Southwest?

Keys: There are definitely signs of overbuilding in our area. About one-third of new facilities opened in the past year are underperforming in lease-up. The market as a whole is healthy, but overbuilding will become a "big deal" in some submarkets. If the pace of new construction does not slow, this trend may spill over into additional submarkets.

Lucas: There are certain pockets of the Colorado Front Range market that are overbuilt--Colorado Springs is a good example. Planners there have made it a simple process to get sites approved; and the rest is history.

Minker: Some areas of the north Texas market are seeing lower occupancy levels. A number of the newer properties are having 18- to 28-month lease-up periods as opposed to the 9 to 15 months they had hoped for.

Witters: I have not seen overbuilding in Las Vegas. Many of our residents have jobs in the hotel/casino industry, which don't pay enough to afford a home. Since we have a fairly high occupancy rate in our apartment complexes, we have a lot of renters who need self-storage services. Also, incremental land prices have made it much more difficult to "pencil" a self-storage project in an area with a lot of "rooftops." Developers are having to purchase larger parcels with office or retail out front on the street with some type of self-storage in the back. This puts the land price in the back of the parcel at a rate that can "pencil" a self-storage project.

5. Are there many conversions (i.e., warehouse to self-storage) in your area? If so, are people concerned this could add too much space?

Keys: There are few conversions taking place in Texas. The primary reason is land is readily available for development, especially in the suburbs. The few conversions that have occurred tend to be concentrated in or near to central business districts, where vacant land is scarce.

Lucas: There have been several warehouses that were converted to self-storage in the central business district of Denver. But with the strong economy we experienced for the last several years, the old warehouse buildings were no longer viable alternatives for developers as it was more cost-effective to convert them to high-end residential lofts.

Minker: As of yet, there have not been a tremendous number of conversions in the area. Land is still available, but the prime locations are being bought quickly.

Witters: I have seen no conversions of warehouse to self-storage in Las Vegas.

6. Which, if any, REITs are active in purchasing self-storage properties in your area?

Keys: Sovran and Shurgard have been buying self-storage properties in Texas, but the pace of acquisitions has definitely fallen off from the level of past years. The other REITs are either focusing on other markets or they're not buying at all right now.

Lucas: Storage USA has purchased a few properties here in Denver, but we haven't seen much activity from the other groups.

Minker: Sovran and Colonial seem to be the most active in acquiring properties in the area.

Witters: I have not seen a keen interest from REITs to invest in self-storage in Las Vegas. The vast majority of the calls I receive are from people who found me on the Internet--either individuals or those who already own self-storage and want to enter the Las Vegas market.

Michael L. McCune has been actively involved in commerical real estate throughout the United States for more than 20 years. Since 1984, he has been owner and president of Argus Real Estate Inc., a real estate consulting, brokerage and development company based in Denver. In January 1994, he created the Argus Self Storage Real Estate Network, now the nation's largest network of independent commercial real estate brokers dedicated to the buying and selling of self-storage facilities. For more information, call 800.55.STORE or visit www.selfstorage.com.

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