Oil Boom Fuels Interest From Self-Storage Investors

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By Beth Mattson-Teig

Reprinted with permission from "The Storage Facilitator" blog.

The U.S. oil industry is producing new hot spots for growth that are sparking the interest of self-storage investors. “In Texas, North Dakota, New Mexico and certain parts of Ohio—really anywhere there is an oil boom—we have seen incredible demand for self-storage products, which has led to increased net operating incomes and increased values for properties,” said Ben Vestal, president of the Argus Self Storage Sales Network in Aurora, Colo.

An oil boom often produces a ripple effect of positive economic growth across a region. The surge of workers pouring into an area to service the oil industry typically creates a need for more infrastructure and services, ranging from housing and grocery stores to restaurants and hotels. That growth is driving development in some markets where, frankly, there hasn’t been any new self-storage construction in years, Vestal said.

North Dakota’s oil boom is putting the state on the map for potential investors. Closing in on 1 million barrels a day, North Dakota now ranks second only to Texas in oil production. “We think there are significant opportunities there,” said Peter Elzi, a principal at land planning firm THK Associates Inc. in Aurora, Colo.

THK has conducted self-storage market analysis for clients who’ve been eying potential investments near the Bakken shale in western North Dakota—specifically in the cities of Dickinson, Minot and Williston.

Existing self-storage units in those three cities are pretty much 100 percent occupied, with a number of facilities reporting they’ve got waiting lists, according to Elzi. In addition, most of the existing facilities are quite old, with gravel and dirt parking lots and few amenities. Furthermore, few units in the area are climate-controlled, which Elzi said is “mind-boggling,” as the region experiences temperature extremes in the summer and winter. “All of those markets are in great need for new, modern facilities,” he added.

North Dakota’s rental rates aren’t high by national standards, largely because of the age of the facilities. In Minot and Dickinson, average monthly rents are 50 to 60 cents per foot. The Williston area is commanding slighter higher rents, as that’s where much of the significant growth related to the Bakken shale has happened. Self-storage facilities in that area are seeing monthly rents average about 75 cents per foot, according to THK, with some newer facilities commanding rents up to $1.30 per foot.

Long-Term Outlook

A key question for investors is whether this oil-fueled growth is sustainable. Oil markets are notorious for their boom-and-bust cycles. Historically, oil booms have lasted five to 10 years. “In the Bakken, we firmly believe this is not a five- or six-year cycle,” Elzi said.

Based on current technology, companies are drilling at a rate of 2,500 wells a year, with the total amount of accessible oil reserves estimated at 50,000 to 80,000 wells. That puts the drilling timetable for that oil at 20 to 30 years.

Texas has long been a leader in the oil industry, and the heart of the current growth is the Midland-Odessa area of West Texas. The region has been recognized as one of the fastest-growing metro areas in the United States. It was that growth that prompted real estate real estate investment trust (REIT) W.P. Carey Inc. to buy four properties in Midland-Odessa a year ago. The four properties comprise 2,541 units and span 361,940 net rentable square feet.

Despite the Midland-Odessa area’s growth, W.P. Carey did a significant amount of due diligence before committing to the deal. The company was wary of investing in an oil-driven economy.

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