In the East

Michael L. McCune Comments
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This month, I gathered a roundtable of experts to discuss the state of self-storage in the Eastern United States. Let’s hear what our local experts have to say about their respective cities and regions. Our panel of brokers includes: John Lisowski, Grubb & Ellis, Pittsburgh; Kathleen O’Brien, Wexford/O’Brien Associates, Arlington, Va.; and Chuck Shields, Beacon Commercial Real Estate, Conshohocken, Pa. Because of the unique economic times, I will also make comments on the national market in contrast to the Eastern market.

Are you seeing a lot of new construction in your area? Are there more large facilities being built or smaller projects?

Lisowski: Special permits make it much more difficult to get zoning for self-storage. Even though the land is zoned for industrial, it is difficult to get zoned for storage. In my area, smaller facilities are being built due to the topographic nature of the land, visibility and lack of zoned sites. The majority of large self-storage facilities being built are conversions.

O’Brien: If there’s even the slightest possibility for self-storage, the land is grabbed up and developed. There is a high demand for land zoned for self-storage. There are few small facilities being built here at all.

Shields: It is more difficult to get zoning for self-storage. There are many more hoops to jump through and hurdles to get over than with other property types. I’m seeing only large projects going up. Once they have the zoning, developers build as many units as they can.

While self-storage is generally strong across the country, this area is unusually blessed in favor of the current owner.

Are you seeing a decline in conversions? If not, briefly describe what is occurring in your area.

Lisowski: One thing I know is when people are considering a conversion, they look for visibility, high traffic counts and good demographics. These are great selling points because they are an opportunity for “free” advertising.

O’Brien: There are beautiful conversions in the downtown Washington, D.C., area. One recent conversion is basically in the shadow of the Capitol Building. It’s an old warehouse with excellent location and great visibility.

Shields: Not many conversions are being done in my area. However, there was one recently built in the outskirts of Philadelphia in an industrial area. The building conversion is complete, but the owners are simply building the interior partitions as needed, and the facility is filling up quickly. I’ve also seen apartment buildings and office space converted.

These work well because they are usually well-located, highly visible and skirt the high-rent commercial retail districts.

As in other metro areas, many of the good conversions have been picked over. Who would have ever thought self-storage would have to compete with loft developers for deals? Has there been any major shift in occupancy and rental rates in the eastern states? What are the rates like?

Lisowski: In the Pittsburgh area, most of the climate-control units you see are within the city limits. Those facilities who offer climate control usually have narrow target markets.

O’Brien: Everyone keeps a close eye on the competition. They’re always rate shopping. Climate-control units don’t bring as great a premium as in Chuck’s market (see below), maybe 10 percent to 20 percent.

Shields: Occupancy rates are up. I haven’t found a lot of overbuilding in this area. Rental rates might be creeping up, but not significantly. Climate control is becoming more popular. I see a premium of 25 percent to 40 percent for climate control in this area.

With limits on the supply like they have here, it makes a great market!

Are banks still lending for self-storage? Do you see any obstacles to obtaining a loan?

Lisowski: I think banks are still lending. They are valuing the properties based on lower occupancies for loan purposes, which will increase the down payment and the loan amount.

O’Brien: I have a lender that has a 5.75 percent rate, down from 6.25 percent in January. He requires 25 percent down instead of the traditional 20 percent for other real estate types such as multifamily, but he is lending.

Shields: Lenders are becoming more educated about self-storage. They are beginning to understand this business and are able to see these projects for the “cash cows” they can be.

If you need to finance, don’t delay, as the volatility in rates you are seeing may be a sign they are about to change. And you don’t want to guess wrong.

In terms of the real estate market and operations, how will 2004 compare to 2003?Howwill it differ?

Lisowski: I see a very stable market. It’s been constant, and I don’t see it will change much in the upcoming year. This area isn’t overbuilt—I’m seeing people looking to build—or convert, if possible, given the constraint of zoned land.

O’Brien: Everything is the same in the nation’s capital and surrounding environs. The demand continues, and the limited supply of land will continue to hold rates and values for existing properties. It is a good time to buy and to sell, if you are so inclined.

Shields: I think John is right on. Sellers are thinking about the possibility of rates rising and wonder if this might be the right time to sell. Rates are down, prices are up.

There couldn’t be a better time to sell, if you’re ready. For the most part, I think the market is fairly stable and will be for the next couple years.

I think our group in this part of the world is looking forward to a good 2004.

Michael L. McCune has been actively involved in commercial 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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