Our roundtable of experts gathered this month to discuss the South Central United States. I’ve asked local broker affiliates to summarize the current self-storage market in their areas and share thoughts on what the future may hold.
Gulf Coast States
Bill Barnhill and Stuart LaGroue, Omega Properties Inc., Mobile, Ala.
Self-storage is still viable along the Gulf Coast of Alabama, Mississippi and Florida panhandle. Over the last year, the area received the most attention because of the overly active hurricane season, which directly impacted the storage industry. Areas along the Alabama coast and the Florida panhandle incurred damage from several storms, but it was the Mississippi coast that suffered the worst destruction, with some facilities being totally destroyed by water and wind.
In many areas, intact facilities were flooded within days. It was common to see renters in Alabama come from as far as New Orleans. Facilities that were 85 percent to 90 percent occupied went to 100 percent for awhile. However, in the past few months we’re beginning to see occupancy rates revert back to pre-storm levels.
In the aftermath of the storms, The Gulf Opportunity Zone Act of 2005, commonly referred to as the “Go Zone,” is providing major tax incentives to business development in parts of Louisiana, Mississippi and Alabama that were declared major disaster areas by President Bush. One key aspect of Go Zone is the 50 percent bonus depreciation, which applies exclusively to new property, and can only be taken on additions or improvements of newly purchased or constructed assets. This opportunity is providing incentives to rebuilding efforts.
Due to the substantial losses incurred last year, many insurance carriers are making adjustments to policies regarding specific coverage. Unfortunately, coverage isn’t available in some areas of Florida, even by state-run carriers. Property owners and elected officials are looking into the problem.
Today, the industry remains upbeat and positive. Several areas along the Gulf Coast are still experiencing record population growth. The overall economy remains robust and demand is still strong for storage. There’s plenty of room for acquisition and many U.S. investors remain attracted to this dynamic region.
Mike Procter of JR Fulton & Associates, Oklahoma City, Okla.
Arkansas has approximately 1,000 to 1,200 self-storage facilities, according to Bill Humble, self-storage owner and president of the Self Storage Association of Arkansas. The new association has several hundred members and was formed to help combat the state’s sales tax situation and organize support for the issues facing the industry. “The self-storage market in the Little Rock area is strong with average occupancy rates between 80 percent and 82 percent, but the expanding northwest area of the state is overbuilt,” says Humble. “With the current rental rates being what they are, it would be hard to justify more facilities in that area of the state.”
In other areas, such as Jonesboro, business is thriving. The city was recently ranked as the sixth-best small city to start and grow a business, and experts suggest there is unmet demand for A-grade self-storage facilities here and other small cities.
“The average rental rates and cap rates (9 percent) for Arkansas currently lag behind all other geographic areas in the U.S.,” says Bill Fritz of Coldwell Banker Commercial Division in Jonesboro. “Although Little Rock is currently oversupplied with 143 facilities, future demand will likely absorb this supply. Owning facilities in Arkansas in the future should translate into high occupancy levels and increasing net operating income.”
The 2006 Self-Storage Almanac shows most Arkansas facilities were built from 1986 to 2000. “Since only 1.7 percent was built in 2004 or later, there is likely an opportunity for new facility development—or redevelopment—in Arkansas,” says Fritz.
In light of the current business environment and macro-economic conditions, there are still self-storage opportunities here, but site selection, unit mix and amenities remain fundamental ingredients of facility success.
John Owens and Barry Comiskey of Westar Commercial Realty, Lubbock, Texas
Over the last year, overbuilding has become a key factor in this market. Our data shows seven new facilities opened, which took a heavy toll on occupancy statistics for the market as a whole. Another downside to overbuilding is the affect it has on the bottom line of a facility’s operations. Many owners have experienced decreases in net operating income. New facilities are offering great move-in and rental specials, forcing the competition to decrease rates to remain competitive. Low rents coupled with increasing expenses, particularly taxes and insurance, are a major concern for owners.
Overbuilding has and will continue to affect self-storage businesses in West Texas. No one knows how many square feet of storage exist and what the demand for that number actually is. The good news is demand seems to be on the rise, but it’s a mystery if supply and demand will ever equalize. Owners and developers should be cautious about future expansion or development. As always, a good feasibility study is critical.
North Texas and Oklahoma
Richard Minker of Richard D. Minker Co., Fort Worth, Texas
While there’s concern the Dallas/Fort Worth Metroplex market is being overbuilt or is oversaturated, construction of new facilities continues. Most is in the North Dallas/Collin County (Frisco/Addison) area. Major regional developers building approximately three facilities a year are now looking at one or two. The exception is All Storage, which continues to build about four state-of-the-art projects of 80,000 to 120,000 square feet each year. In addition to building mega facilities, the operator pursues aggressive marketing, offering 50 percent discounts off the first three to six months of a lease. This dramatically impacts unit and economic occupancy of the area.
A September 2005 market survey, commissioned by the Texas Self Storage Association, reflected in excess of 1,100 facilities in the Dallas/Fort Worth market. Of the 962 surveyed, average unit occupancy was 82.7 percent and economic occupancy was 75.9 percent. Because of new development, most operators are struggling to maintain their existing unit occupancy and especially economic occupancy. In addition, many large regional operators are being bought by prominent national chains.
In Oklahoma, new facilities are adding to the Oklahoma City inventory, but not to the degree of Dallas/Fort Worth. Unit-occupancy rates range from the mid-70s to high-90s, with an overall market occupancy in the mid-80s. Oklahoma has more than 800 facilities with the greatest concentration in Oklahoma City and surrounding areas. Oklahoma City/Norman area is somewhat oversaturated.
The next largest market is Tulsa/Broken Arrow, where there had been limited growth except near Owasso, which experienced a stagnant or declining economy because of job losses but is now on the rebound. Occupancy is firming up and, as a result, operators are increasing rates. Tulsa occupancies range from about 75 percent to 80 percent, depending on location and age of facility.
Overall, new development is slowing for three reasons. First, markets are being oversaturated; new facility lease-up to a stabilized level takes 24 to 36 months. Next, the cost of building materials is driving up overall development costs. Finally, the increase in interest rates for construction and permanent financing is impacting development. All told, the economics of new development are not as attractive as they’ve been in the past.
As for sales of existing facilities, more independents are thinking about selling. Several regional players in North Texas have sold out to the U-Store-It chain from Middleburg Heights, Ohio, and operate under the U-Store name. The last major sales in Oklahoma were the disposition by Storage USA in both Oklahoma City and Tulsa. Cap rates range from 7 percent to 11 percent, with the majority of sales in the 9.5 percent range.
With current economic conditions and slowdown in construction, most operators hope demand catches up with supply.
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; visit www.selfstorage.com .