We asked real estate brokers in the West to comment on the self-storage market in their areas and share thoughts on how it will perform in the future. Joining us in the discussion are Richard Arnold of Argus Northwest Realty in Portland, Ore.; Clifford Crowe of Lee & Associates in Carlsbad, Calif.; David Laney of Realstar Commercial Real Estate in Albuquerque, N.M.; Ryan Layton of American Real Estate Associates in Spokane, Wash.; and Joan Lucas of Joan Lucas Real Estate Services in Denver. Current and potential storage owners can benefit from the local knowledge provided by our experts.
Are secondary markets (i.e., smaller, second-tier cities) in your area a good choice for self-storage? Do they present upside opportunities for owners?
Arnold: I believe secondary markets are good for self-storage because there are a lot more facilities available in the $1 million to $2 million range. Many people want to get into the market but can’t afford the down payment for a larger facility. Buying in a secondary market is the only way some folks can get into the self-storage business. It’s the first step in becoming a significant player in the industry.
Crowe: In Southern California, we have seen significant amount of overbuilding in second-tier cities. This may be due in part to the availability and affordability of land when compared to the larger cities.
Laney: Smaller market areas in New Mexico are growing about national growth benchmarks. Investors should look to the oil patch areas of Southeast New Mexico (Roswell, Hobbs, Carlsbad, etc.) as development costs tend to be lower and local governments are more business-friendly. Two other markets to watch are the Las Cruces and Alamogordo areas in South New Mexico as they are experiencing double-digit population growth, with retirees and second-home owners flocking to the area. The ability for self-storage owners to get into these areas before others will provide a great advantage to investors.
Layton: I truly believe smaller marketplaces are some of the best places for an investment. Projects in Washington State have produced 8 percent to 10 percent cap rates in many second-tier cities. Projects are typically highly occupied with stable profit and loss sheets, lower management costs and less big-city bureaucracy. These areas may not have the same high-appreciation levels as the bigger markets, but stability is sometimes a great investment.
Lucas: In Colorado, smaller markets present good and bad news. It’s almost always easier to get a project approved in a smaller market, but rental rates are not commensurate with the major population centers along the Front Range. Many large projects are on the drawing boards in smaller cities because ground is much less expensive and permits can be acquired in a shorter time frame. Smaller projects of 10,000 to 20,000 square feet are also springing up around the state.
What effects are portable-storage businesses having on traditional self-storage in your area?
Arnold: Portable storage is growing in popularity, but I haven’t heard of any adverse effects on conventional storage in Oregon. It can be a convenience for someone who wants temporary storage on site during construction or remodeling, but I don’t see it as being significant competition.
Laney: The concept of portable storage has not really established itself in New Mexico yet. Early rumors of its cost structures deterred a lot of people from being interested. The lack of suitable industrial warehouse space in our market has kept this concept from gaining widespread acceptance.
Layton: Portable storage has not made much of an impact in our area. The average customer still prefers traditional storage.
Lucas: I have spoken with several developers interested in getting into the portable-storage business, but at this time, I don’t see any appreciable impact on the existing static inventory in Colorado.
With the lending markets tightening underwriting standards and the recent increase in interest rates, how have cap rates in your market been affected?
Arnold: We haven’t experienced any adjustments in cap rates as a result of the changes in the lending market. If interest rates become deal killers, I suspect there will be more contracts between sellers and buyers if money becomes too tight.
Crowe: Deals closed through August had no effect on the cap rate. It was anticipated that it would have an effect as we entered fall. The buyers have become cautious and certainly want actual numbers instead of pro forma.
Laney: Although interest rates are still lower than the pre-9/11 era, the fact that there have been 17 rate hikes in the last 18 months has created some momentary pause in sellers and buyers. I’ve advised my selling clients that, with the cost of funds increasing and the tightening of underwriting for all commercial products, cap rates will probably rise to 8.5 percent to 9 percent for a class-A project in the top three urban markets in New Mexico (Albuquerque, Santa Fe, Las Cruces).
Layton: Cap rates are starting to rise, and buyers are not so inclined to purchase “blue sky” as they were in the past few years. They want to purchase on real numbers and not pro forma anymore due to the lending restrictions. Thus there have been higher caps and a shift to “reality” in the overpriced marketplace.
Lucas: Cap rates are definitely going up. I just closed a $7.2 million deal for a highly qualified buyer, and the lender would not rate lock until 24 hours before closing.
Given the turmoil in the finance markets, are you sensing that owners are focusing more on refinancing, continued ownership or selling?
Laney: Some sellers are focused on the impact of the financial market turmoil and will probably wait until February 2008 to place their properties on the market. Other sellers are more focused on “life changes” like retirement or estate planning and are aware of the situation but not changing their decision-making process. Often, these sellers are listing their properties to increase their personal liquidity.
Layton: Continued ownership is the current strategy in stable markets as there is nothing better for owners to put their money into. In the overbuilt/ saturated marketplaces, selling is currently becoming a popular choice.
Lucas: I think most owners are waiting it out. Blue skies will return!
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, a marketing medium for owners in the self-storage industry. For more information, call 800.55.STORE; visit www.selfstorage.com.