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Real Estate Roundup: Self-Storage in the Southeast States

Michael L. McCune Comments

This month, our roundtable of real estate experts discusses the self-storage market in the Southeast United States. Our panel members includes William Barnhill, Omega Properties Inc., Mobile, Ala.; Dale C. Eisenman, Midcoast Properties Inc., Hilton Head Island, S.C.; Stuart LaGroue, also of Omega Properties; Grady Riggs, Long & Foster Real Estate, Fairfax, Va.; Stephen Rigl, Orion Commercial Ltd. Corp., Miami, Fla.; and W. Frost Weaver, Weaver Realty Group, Jacksonville, Fla.

1. Are secondary markets (i.e., smaller, second-tier cities) in your territory a good choice for self-storage?

Eisenman: Smaller markets can be productive for self-storage but the same principles apply as in larger markets. Investors should carefully review the local market to estimate demand and calculate supply.  A small community may offer less supply per household than a metro area, but the demand may also be lower as measured in square feet and/or the price tenants are willing to pay for storage. If there is demand for storage and the rents justify the investment, the property can be successful regardless of the city’s size.

LaGroue: In some instances, small and second-tier cities are a good choice because many of the larger, primary markets have become saturated with storage. However, this does not necessarily mean one should rush into these potential markets without first doing an analysis. If a smaller market appears to have fewer units and properties, there may very well be a reason such as low demand or household income. Also, in many smaller markets, there tend to be fewer barriers to entry for future competitors. As we all know, the days of build and they will come are long gone. That’s why it’s imperative to conduct a feasibility study.

Riggs: Many second-tier cities in the mid-Atlantic region are becoming attractive to big businesses and expanding federal government agencies due to their relative lower cost of land, cost of construction, housing and better transportation facilities to and from major cities. As a result, many of these smaller locales like Winchester, Va., are seeing tremendous growth. The Base Realignment and Consolidation will impact many second-tier cities in the coming months in Maryland and Virginia with increased population growth and thousands of new jobs. With this growth comes a demand for storage.

Rigl: Prices have lost some of the firmness accumulated in the past few years and have leveled off, especially in smaller outlying markets. There is overbuilding in certain markets so the demand side must be duly considered. Hurricane Wilma a few years back had a perversely positive impact on self-storage occupancy in south Florida, driving it to high levels. Some of that has now bled off creating some vacancy in certain markets.

Weaver: Much northern Florida activity has been in the secondary markets. These markets generally present good investment opportunities for the private investor because the properties are typically smaller and more affordable. Additionally, the major self-storage operators are usually not present, and until the recent housing slump, these markets have been growing faster on a percentage basis than the urban market. I believe this trend will continue.

2. Given the unsettled investment markets, how are buyers and sellers reacting?

Barnhill: Many sellers still have higher expectations on pricing than rental rates are able to support. Buyers are still available but want a realistic cap rate. Money is still available from local banks but a lack of conduit loans has slowed down acquisitions somewhat.

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