Real Estate Roundup

Michael L. McCune Comments
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Our roundtable of experts gathered this month to discuss self-storage in the South-Central States. I asked our local broker affiliates to summarize the current market in their areas and share thoughts on what the future may hold.

What impact has portable storage had on traditional self-storage businesses in your area?

Alan Barnhill: In eastern Tennessee, we’ve seen a noticeable increase in the number of franchised, national-name, portable-storage businesses and locally owned or “non-franchised” mobile-storage businesses. Along with this increased market presence, there seems to be an increased consumer understanding of this new storage product. In fact, some traditional self-storage owners are contemplating offering portable storage in addition to their regular units. This may indicate an increase in market demand, but when speaking with traditional facility owners, it’s unclear what impact portable storage is making with regard to actual unit demand and occupancy levels.

Bill Barnhill: The impact of portable storage in Alabama and Mississippi represents a valid concern for the self-storage industry. After hurricanes Ivan and Katrina, thousands of portable units were rented along the Florida, Mississippi and Alabama coasts, and were especially useful for onsite construction-related storage. As traditional storage facilities reached full capacity, portables helped fill greater needs. Hence, we can see portable units have the natural advantage of being shipped to areas where demand is greater.

Currently, it appears portable business occupancies are significantly less. The impact on traditional storage is somewhat minimal since the number of available portable units is only a small percentage of traditional storage. Additionally—and even though their uses overlap significantly—some of the uses are not the same, such as onsite storage of construction materials and equipment.

Mark Keys: Portable-storage operators are not really having a noticeable impact on individual storage facilities as far as I can tell in the South and Central Texas markets, at least not yet. Some business is lost to these competitors, but it’s akin to the business a traditional retailer loses to Internet sales. Direct competition is much more noticeable.

Richard Minker: In the North Texas and Oklahoma markets, we’re not seeing much impact from portable-storage business on occupancy or rates. However, some upperend facilities are showing concern that this type of service may begin to impact their customers because of the pickup/ delivery options and the ability to store the unit at the customer’s home. Lower-end facilities are not as concerned about being impacted by this trend, but at this point, it’s difficult to tell what the long-term impacts will be on the traditional self-storage market.

John Owens: Portable storage has had a very mild impact in West Texas, mainly because of overbuilding. Supply in most areas has exceeded demand, making prices very competitive and hard for portable-storage operators to find success.

Property insurance has recently been a big issue for storage owners in the South. What trends are you seeing with insurance expenses and how is this impacting owners?

A. Barnhill: Hurricanes and tropical-storm activity in recent years have created a real problem with insuring facilities at a reasonable cost. In some coastal areas, it’s next to impossible. Obviously, this is adversely affecting the bottom line and market value of facilities.

B. Barnhill: Coastal Mississippi and Alabama have been seriously impacted by increases in insurance wind premiums in recent years. One large facility 10 miles inland reported wind premiums escalating from $8,000 to $150,000 over a three-year period. The trend appears to be leveling out, but deductibles are in the 3 percent to 10 percent range.

Barring another hurricane this season, the industry should settle down. Some insurers are willing to continue writing for present owners with increases for wind deductibles. On the other hand, insurers are not always willing to continue underwriting properties when there’s a change in ownership. It pays to shop around. Some insurers will take the risk while others are unwilling.

Keys: Insurance costs have risen in general, particularly in coastal areas. Recent hurricanes have caused insurers to grow wary. Some areas have been “red-lined,” making it very difficult to secure new coverage. This impacts an asset’s liquidity because it’s hard to sell a facility if the buyer can’t get insurance.

Minker: Many owners in my area haven’t seen too much impact from rising insurance rates. Rising premiums are not anything out of the ordinary, and owners have little trouble passing those additional costs onto customers.

Owens: West Texas is fortunate to have not had a lot of insurance increases. Most owners have indicated that minimal increases in rents have successfully combated any rise in property insurance.

Overbuilding continues to be a concern in many areas. Is your market overbuilt?

A. Barnhill: In most major metro areas are pockets that are saturated or overbuilt, but I wouldn’t classify any market across the board as overbuilt. This type of market condition requires developers to be especially thorough in their site analyses and understanding of local conditions—not only with current and potential market demand but competition as well.

Keys: While the per-capita supply has steadily risen throughout Texas, our markets are not overbuilt. A significant portion of demand is tied to home sales and, despite the national slowdown, residential real estate markets are still very strong in Texas.

LaGroue: Overbuilding is and will continue to be an issue for several areas. Certainly some of the markets in Alabama and Mississippi are overbuilt or beginning to experience this phenomenon. Over the last several years, self-storage has become such a popular real estate asset class that it draws a lot of attention and interest from potential investors. Many individuals and companies want to “get in on the action” and, unfortunately, don’t always do their homework; in some instances, they’ll build storage when and where it may not be necessary. In the process, they unintentionally overbuild a market. Also, the “Go Zone” benefits have contributed to some overbuilding along coastal areas.

Minker: Overbuilding is a selective problem in areas in Oklahoma. We’re seeing some new development in certain areas, but not excessively. In North Texas, large developers like All Storage are building big facilities in the Tarrant County market and having a significant impact on rental rates and occupancies.

Owens: Parts of our market are overbuilt while some seem to have a very steady demand. Some recent sales have been on tear-down facilities in new growth areas where the land value exceeded storage value. We’ve been told the tear-down projects helped surrounding facilities.

What are current cap rates in your market, and do you anticipate a shift in the next 12 months?

A. Barnhill: Current cap rates range between a low 8 percent to 9 percent and higher. They’re slowly, steadily increasing and are expected to continue.

Keys: Cap rates vary dramatically depending on project location and quality. Recent sales in Texas reflect cap rates from 7 percent to 11 percent. So far, cap rate increases have lagged behind mortgage-interest rates. I expect the trend to continue for the short term.

LaGroue: Cap rates in our markets have held steady in the 8 percent to 9 percent range in the primary markets, while secondary and tertiary markets have been between 9 percent and 11 percent. I anticipate cap rates will rise over the next 12 months, especially if the 10-year Treasury continues its upward trend. It won’t be a drastic increase, but rather a gradual escalation. Obviously with this predicted trend, valuations will decrease.

Minker: Class-A facilities are seeing cap rates in the 6 percent to 6.5 percent range, but 7 percent to 9 percent is typical for average facilities, and 9 percent to 10 percent is common for lower-quality properties. Buyers tend to be seeking properties in the 8 to 9 percent range.

Owens: Our market has seen cap rates between 8.75 percent and 9 percent, but will likely change depending how the market shifts due to: 1) any rise in interest rates (10-year Treasury Notes); 2) CMBS lending requirements despite any changes in interest rates; and 3) property taxes.

What is current storage demand in your market as reflected in rental rates and occupancies?

A. Barnhill: Our average rental rates and occupancy levels decrease as a result of increased development and competition in some areas. While some localized exceptions exist, finding an area that’s underbuilt—or where rental rates and occupancy levels are increasing—is hard to find.

Keys: Demand for storage properties across Texas remains solid as reflected in the overall market occupancy rate of 86 percent. Rental rate growth is averaging from 3 percent to 5 percent annually.

LaGroue: Demand for storage in most of our markets remains relatively strong. Areas that are overbuilt or becoming overbuilt have experienced a decline in occupancies. These facilities have been offering concessions and incentives to try and increase rentals.

Minker: The market is firming up and occupancy is good. Supply of vacant units is low, and owners are able to use selective rental-rate incentives for low-occupancy sizes, rather than adjusting rates across the board. In Oklahoma and Texas, jobs are growing, and the economy is strong and fairly stable. Overbuilding remains a threat in certain markets, but overall demand is strong.

Owens: Fortunately, we haven’t seen new facilities over the past 10 months in our area, and we have seen a slight increase in demand. Rental rates and occupancies have increased slightly as a result. 

Michael L. McCune is president of the Argus Self Storage Sales Network, a self-storage real estate brokerage and development company based in Denver. Argus also operates www.selfstorage.com, which features information about all Argus broker affiliates in addition to providing marketing resources for owners in the self-storage industry. For more information, call 800.55.STORE.

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