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Investors’ Paradise

Steven M. Ekovich Comments
Posted in Articles, Development

In most regions of the country, self-storage has strengthened and will continue to improve well into 2007. A number of factors will bolster the sector, including access to relatively cheap capital.

In addition, people priced out of the housing market and into rental apartments (because of rising interest rates and defaulting loans) have prompted greater demand for storage. This has garnered the attention of commercial real estate investors, who can’t rely on returns offered by multifamily, traditional office or retail property sectors.

Instead, they discovered the self-storage investment market has become a tremendous cash-flow vehicle, providing buyers with steady revenue, limited management responsibilities, upkeep and overhead. As baby boomers downsize their residences, they need to store possessions somewhere. Consequently, self-storage is flourishing.

More than 41,000 facilities exist in the United States, according to Marcus & Millichap’s National Self- Storage Group. The word is out: Self-storage is a good performer. Cap rates and yields tend to be about 100 to 200 basis points above apartment or retail yields, so they’re better cash-flow vehicles. Renters expect to stay only a few months in self-storage but actually average 12 months, comparable to apartment tenancy, reveals Marcus & Millichap Research Services.

Built in 2001, the Hi-Tech Self Storage Property in Oakdale, Calif., sold for $3 million. It sits on 2 acres and comprises 312 units.

Solid Performance

Rental rates slowed a bit, yet still rose 4 percent on a seasonally adjusted basis during the second quarter of 2006 compared to the same quarter in 2005. Nationwide, occupancy rose 2 percent, the largest single increase since Pasadena, Calif.-based Self Storage Data Services Inc. (SSDS) began tracking the industry on a quarterly basis. The number of facilities offering concessions—incentives or discounts—declined nearly 15 percent. With rental-rate and occupancy increases, plus a decline in number and cost of concessions, revenue per occupied square foot increased nearly 7 percent.

Approximately half of U.S. facilities offer incentives or discounts to attract tenants. During the second quarter of 2006, only 48 percent of properties surveyed by SSDS offered them, a decline of nearly 15 percent compared to the same quarter last year. This follows a 17 percent decline in the first quarter of 2006, compared to the first quarter of 2005, and indicates the need for self-storage has solidified.

Asking rents increased 1 percent compared to a 2.1 percent increase in the first quarter of 2005. Occupancy jumped 50 basis points, up from the 10 basis points growth in 2005. The nearly 4 percent decline in the number of facilities offering concessions contributed to the revenue per occupied square foot rising 1.7 percent, compared to 2.5 percent last period.

The West Is Best

Market growth is predicted for the Southeast, West and Midwest. According to SSDS, the Charlotte-Gastonia-Concord, N.C., metropolitan area is the most improved market in the country as of the first quarter of 2006. SSDS determines what areas make the most improved list by evaluating increases in rents and occupancy.

Other areas on the list include:

  • San Jose-Sunnyvale-Santa Clara, Calif.
  • Minneapolis-St. Paul-Bloomington, Minn.
  • Tampa-St. Petersburg-Clearwater, Fla, 
  • Chicago-Naperville-Joliet, Ill.

The West continues to outperform the rest of the country, according to SSDS. Revenue per occupied square foot jumped 12 percent. Nevada, Utah, Arizona, New Mexico, Colorado, Wyoming and Montana led the nation and region with the strongest performance—a 15.2 percent increase in revenue per occupied square foot.

The Southeast, home to fast-growing Florida and Georgia, will continue to garner strong investment activity in 2007, according to Marcus & Millichap’s research. Economic indicators remain healthy and sustained population growth will lead to further occupancy improvement. Construction will ease this year as developers are projected to add 4.1 million square feet of storage space compared to 4.5 million square feet added in 2005. Development will remain strong in Florida, particularly in Jacksonville, as well as in Atlanta and Washington, D.C.

The Midwest and North Central regions are experiencing improving economic conditions, stronger operating performance and sales activity in 2006. Economic recovery in the region has lagged behind national averages and has the lowest job growth compared to other regions. Further, people are moving out of the Midwest and Plains states to warmer climates or areas with stronger economies. However, with the exception of rural areas in Idaho and Arkansas, most of the region’s metropolitan areas are undersupplied and, therefore, attracting investors.

Quality Improvements

There is an increase in institutional players seeking to develop new properties, partnering with local or regional developers. Self-storage is no longer just a place to land bank, or a place to develop an irregular or unattractive lot. Likewise, facility construction quality has improved. New properties feature multi-stories, beautiful facades, attractive offices and state-of-the-art surveillance. Wine storage is more prevalent, and some sites even provide valet service.

Your Personal Vault is a 55,314-square-foot property in downtown Detroit. The 878-unit self-storage facility is listed at $3.5 million.

Since 1997, more than 20,000 new facilities have been added to the U.S. inventory. At the end of the first quarter of 2006, 435 self-storage projects were scheduled to come online, representing a 16 percent increase over the 375 projects planned at the end of 2005.

NOIs Surge

Net income per individual occupied unit for the second quarter of 2006 was up 9.7 percent from the same quarter last year, according to SSDS. Considering the 12-month tenancy average, NOI per occupied unit increased 2.3 percent for the four quarters ending June 30, 2006.

By the end of 2005, self-storage REIT returns significantly outpaced other property sectors and the overall composite index, according to Marcus & Millichap. Self-storage returns averaged 24.3 percent followed by industrial/office at 10.8 percent and retail at 10.2 percent. The overall REIT composite index posted a 6.9 percent return. Supporting self-storage returns were the aggressive acquisitions made throughout the year. For example, Extra Space became the nation’s second-largest operator after its $2.3 billion acquisition of Storage USA.

Full Speed Ahead

In 2005, about $600 million in self-storage properties traded hands in the United States, nearly twice the amount sold in 2004. By the end of the year, self-storage sales will top $1 billion. The future holds great promise for this industry.

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