Many self-storage operators around the country are beginning to see occupancy levels increase, and the real estate market is also showing signs of improvement. In this article, real estate experts from the U.S. south-central region discuss leasing activity over the past 12 months, and debate whether now is a good time to sell. The contributors are:
- Bill Barnhill, Stuart LaGroue and Shannon Barnes, Omega Properties Inc., Mobile, Ala.
- Mack Browder, Crye-Leike Commercial, Memphis, Tenn.
- Bill Brownfield, MKP Self Storage, Houston
- Larry Goldman, RE/Max Best Associates, Kansas City, Mo.
- Jared Jones, Bauer & Associates, Tulsa, Okla.
- Richard Minker, CASE Commercial Real Estate, Fort Worth, Texas
In your market, how have self-storage occupancies and leasing activity held up in the major metropolitan statistical areas (MSA) over the last year?
Barnes: In Alabama and Mississippi, occupancies for the last 12 months have been generally steady with typical seasonal variations. Although the occupancies have been stable, many owners have been using more incentives to entice customers to rent. Now more than ever, it’s important to focus attention on marketing and management to maximize revenue. Now’s the time, with competition being so intense, when one needs to be proactive in managing self-storage.
Browder: Many markets in Tennessee are overbuilt, and occupancies are well below the levels seen a few years ago. I expect a gradual uptick in leasing activity and occupancies over the next six months, depending on the overall job outlook in the state.
Brownfield: Occupancies have increased nicely since bottoming out in late 2009, probably up a total of 5 percent or so in Central and South Texas. Local economies in Austin, Houston and San Antonio are growing, albeit slowly. Corpus Christi and Brownsville-Harlingen seem to be moving sideways to slightly positive. That trend could reverse, though, if the national economy weakens to the point of entering a second recession. That will drive occupancies down again, even in Texas.
Goldman: For the most part, leasing has improved dramatically in most markets in Arkansas over the last year. This trend will continue through 2011.
Jones: Overall, occupancy rates in Tulsa, Okla., decreased 2.3 percent to 84.2 percent in 2010. Several owners we spoke with indicated rates have been stable this year, while others mentioned 2011 is experiencing minor growth in leasing activity after being flat for 2010. In Oklahoma City, most owners have seen slight decreases in occupancies and rates over the last year and expect seasonal decreases for the remainder of 2011.
Minker: Markets throughout north Texas are holding up well. While occupancy that was driven by the new home market has fallen, those renters are being replaced by renters who are victims of today's economy. For the next 12 to 18 months, the feeling is self-storage occupancy will continue to be stabilized and, in many instances, will firm up even more.
As investors re-enter the acquisitions market, should potential sellers consider holding off for a while longer or is now a good time to sell?
Browder: In Tennessee, we’re seeing many owners who have an unrealistic idea of what their property is worth in today’s market. Many owners of single-location, non-metropolitan properties with less than 350 units have been unable to maintain occupancies above 70 percent. Their actual profitability is well off projections. However, they still expect to sell at capitalization (cap) rates comparable to sales of properties in dense population markets with high barriers to entry.
Brownfield: Timing the market is tough, whether it’s real estate or stocks, so the only honest advice I can give is to “sell before you need to,” when the timing seems right from a financial or family-planning perspective. Your decisions will be sounder if you follow that maxim. Buyers always ask “Why is the owner selling?” because they want to gauge a seller’s motivation, probing for weakness, and they will offer less if they sense a need to sell.
Management is a key. If the current owner/managers do not have an achievable plan to increase occupancy and profitability, they might as well sell now and take advantage of the increasing number of buyers in the market.
Goldman: In general, we’ve seen facility performance improve over the past couple of years in Arkansas, and interest rates are still low. There are still some very motivated sellers out there, which is critical.
Jones: Now’s a great time to sell, especially for an owner with a stabilized, quality property. There’s a large amount of money on the sidelines for class-A product, and buyers will pay sub-8 percent cap rates on actual and trailing income for these properties. In the rural Oklahoma market, there’s activity on property priced competitively to sell; for example properties priced with 10-percent-plus cap rates on trailing 12-month income. One of the challenges with rural markets is getting financing as it tends to originate on a local level.
LaGroue: Since both large and small investors have re-entered the acquisitions market, now’s definitely a good time to consider selling. For the most part, investors are looking for two specific property types, the first being well-located, class-A facilities in primary markets. The other is distressed facilities that are struggling but could be turned around, offering plenty of upside potential for a new owner. There’s also demand for facilities that don’t necessarily fit into those two categories.
In most all cases, except distressed situations, potential buyers regardless of size are going to look at the trailing 12-month income, and incorporate adjusted expenses for the new owner using a cap rate indicative of that particular market. Since cap rates are still relatively low and buyers are out there, now’s as good a time as ever to sell.
Minker: If an owner is considering selling, now’s as good a time as any in the north Texas market. In spite of the overall economy, occupancies are holding up well. Cap rates are becoming more attractive with the passage of time. There’s a good bit of money chasing limited investment opportunities, so well-developed and occupied facilities are bringing a premium compared to the rest of the market in today's terms. At the same time, capital is beginning to loosen up. For those who qualify, there can be money out there to purchase quality facilities.
Ben Vestal is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self storage buyers and sellers and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE; e-mail firstname.lastname@example.org .