This month, I gathered real estate experts to discuss the state of self-storage in the South-Central United States. Letís hear what they have to say about their respective cities and regions. Our panel of brokers includes: Bill Barnhill, Omega Properties Inc., Mobile, Ala.; Barry Comiskey, Westar Commercial Realty, Lubbock, Texas; John Raines, The Real Estate Connection, Trenton, Tenn.; and Tyler Trahant, Richard D. Minker Co., Fort Worth, Texas. I asked our brokers straightforward questions every owner and potential buyer will find pertinent, including their predictions for self-storage in the new year.
1. As you look back on 2004, what are your thoughts about the self-storage market in general?
Barnhill: The demand for well-located properties has been exceptional. It has been a banner year.
Comiskey: Things have been extremely competitive on the leasing front, with deep discounts. This is because of overbuilding in most of the larger markets. The overbuilding is driven by low costs and liberal loan underwriting, but the demand for well-located and -occupied facilities remains very strong.
Raines: The self-storage market has remained strong this year, with more buyers than sellers. There has been an equal amount of interest in small facilities as in large ones.
Trahant: In our markets, we are seeing a lot more building and, therefore, more rental concessions. There are still a large number of investors looking to get into the market; however, they are a lot more particular on the type of property. Many facilities will need to reinvent the way they conduct their marketing to compete in today’s marketplace.
This has been a stellar year for self-storage buyers and sellers. Clearly, low interest rates are driving this phenomenon. And, at least for the time being, rates are still low. However, pressures in the financial markets auger higher rates in the future.
2. Did you witness a lot of transactions this year? Describe the activity in your market.
Barnhill: There have been quite a few transactions closed in our marketplace, with others to close before year-end. It has been the most active year in recent history.
Comiskey: There was not heavy transaction volume in West Texas. The buyers are here, but the sellers just like the cash flow and don’t have many alternative investments that produce like self-storage.
Raines: The market in Tennessee saw more transactions than in the past couple of years. I expect this trend to continue in 2005. I’ve noticed more owners considering selling. Buyers continue to outnumber facilities for sale.
Trahant: Oklahoma was very active with the sale of the SUSA portfolio of 14 properties, plus a handful of other properties changing hands between existing owners. The North Texas market has not seen many sales in 2004, but the final quarter of the year could prove to be fairly active.
This will be a record year for transactions. Many owners are finding now is the time to sell, and buyers are finding low interest rates irresistible, creating a remarkable consensus on the highest values ever seen in terms of value per dollar of income.
3. Are other types of real estate underperforming and drawing buyers to self-storage?
Barnhill: I believe self-storage has certain attributes, such as low maintenance and ease of management, which attracts buyers to this industry. Although some types of real estate might be underperforming, self-storage has remained steady.
Comiskey: In general, I don’t think real estate is underperforming as opposed to other investments, i.e., stocks, bonds, cash, etc. Real estate is a good value. I have not seen asset relocation in my market area.
Raines: Yes, I believe this may be is true. However, the majority of buyer prospects I have talked to are current self-storage owners looking to add facilities.
Trahant: In the markets I serve, the competition in self-storage is becoming comparable to that of other real estate types. Buyers are becoming smarter, analyzing the potential for competition to move into an area, and will discount the value of a property if the barriers to entry are too low. I have seen as much activity in the office market as in self-storage due to the fact that competition in the business has increased.
4. I have seen a lot of investors pull out of other real estate types to buy self-storage this year. Do you foresee the same for 2005?
Barnhill: Unless interest rates hit a critical point, self-storage should perform about the same in 2005 as in 2004.
Comiskey: I have seen strong money inflow to my market, mostly from West Coast investors who feel they get more value in Texas property than in their local markets. They have pushed up prices, especially in the multifamily and duplex markets. I feel this trend will subside in 2005.
Raines: Some investors are leery of the stock market and are moving into real estate investments. Many are interested in self-storage. I get calls every week from buyers new to the business, and I believe this will continue in 2005.
Trahant: I have seen a lot of investors pull out of other investment types to buy self-storage this year. The answer is different for each market. In a market that sees overbuilding of one sector—for example, what happened with office buildings in Dallas—there will be investors looking to other product types. In markets that have seen a lot of self-storage construction, I don’t see an influx of new buyers occurring.
5. Describe how you view the recent cap-rate trends in self-storage. What will happen with cap rates in 2005? What impact do they have on buying and selling?
Barnhill: Cap rates should edge upward if long-term interest rates increase, although not necessarily in a linear fashion. Cap rates are used merely as an estimate of value. If cap rates for self-storage were higher than for other types of real estate, it would continue to drive the acquisition market.
Comiskey: Cap rates have bottomed out, but they will rise again. This will be based on increasing interest and vacancy rates. It depends on which side of the transaction you are. I think buyers will get a better value with properly structured deals.
Raines: Recent trends in self-storage have put cap rates at historically low averages. That’s no secret. In 2005, I expect the market to push cap rates slowly upward. Cap rates greatly affect the buying and selling of self-storage properties. When they are more constant and the range is narrower, it’s easier for a buyer and a seller to agree on a rate—and value. When cap rates are moving up or down, buying and selling activity increases. However, if the rate is moving, it becomes more difficult for buyer and seller to agree.
Trahant: Cap rates have gone up slightly on the properties with which I have been involved. Buyers are now looking at the trailing 12 months income as well as the possibility of new competition coming online in their markets. In my experience, buyers are not willing to pay for income that has never been achieved and are even hesitant to pay a slight premium in heavily developed markets. Over the next year, we will see cap rates remain fairly constant. With interest rates at current levels, buyers will still be active in the market. However, I do not believe the self-storage industry will see either a great number of new buyers or existing owners exiting the market.
Please refer to my column in last month’s issue, “Cap Rates—A Mystery Revealed.”
6. What would you like to see different in the self-storage marketplace in 2005?
Barnhill: It is my impression, assuming things like income taxes and interest rates to be equal, that 2005 will continue to be a good time to acquire and sell. I hope interest rates will stabilize and the economy will run more smoothly.
Comiskey: I would like to see less development and rising occupancy rates. When you have new facilities with a 60 percent to 70 percent occupancy rate, you need to assess your supply-and-demand situation.
Raines: I don’t anticipate any drastic changes in the self-storage marketplace in 2005. I’d like to see the industry become more consistent at valuation techniques. In Tennessee, I hope buyers and sellers realize what a unique marketplace exists today. There are excellent opportunities for both.
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 1994, he created the Argus Self Storage Real Estate Network, now the nation’s largest network of independent commercial real estate brokers dedicated to buying and selling self-storage facilities. For more information, call 800.55.STORE or visit www.selfstorage.com.