“If you are a long-term holder, like we are, you want to make sure there is sustainability there, and it’s not just a five-year boom and then you have problems on the downside,” said Ann Coolidge Taylor, managing director in the Dallas office of W.P. Carey. The REIT holds ownership stakes in about 170 self-storage facilities in the U.S.
One factor that helped put W.P. Carey at ease with the West Texas acquisition is new hydraulic fracturing, or “fracking,” technology. Some data suggests fracking makes it economically feasible to drill even if the price of oil were to drop by up to 30 percent, Taylor noted. In addition, the area is also seeing new industries popping up alongside the oil. For example, Seattle-based Summit Power Group LLC is building a $2.5 billion clean-coal facility near Odessa. W.P. Carey’s Midland-Odessa properties, which operate under the CubeSmart brand, are experiencing average occupancy rates of more than 90 percent.
Barriers to Entry
While the growth opportunities are attractive and potentially lucrative, getting a foothold in oil-rich markets is not easy. “The biggest barrier to entry is finding capital,” Elzi said.
Fearing the bust part of the boom-and-bust cycle, banks are wary of lending money in oil-boom regions. And then there are development challenges. In North Dakota’s Dickinson-Minot-Williston area, land prices have spiked thanks to increased commercial development, and obtaining industrial zoning for land near residential areas can be difficult.
The remote areas of North Dakota can be a tough sell for some national investors. “I don’t think the national players will be going to a Williston, North Dakota, anytime soon, simply because the scale of operation up there for self-storage is better suited to the local and regional operators,” Vestal said. However, North Dakota is seeing more out-of-state interest from regional investors. Argus recently brokered the sale of a property in Williston to an investment group from Aspen, Colo.
Yet another barrier to new construction in oil markets such as West Texas is a shortage of resources, such as construction workers and equipment. Self-storage tends to fall fairly low on the priority list for infrastructure projects in oil-boom areas. At the time W.P. Carey was considering its Midland-Odessa acquisition, seven hotel projects were under way in the region.
“When some of the infrastructure has been built out and there are extra resources for self-storage, then there will be the demand to accommodate the extra supply, because it is an area of high growth,” Taylor said.
Beth Mattson-Teig is a contributing author to a variety of national business and trade magazines, including “National Real Estate Investor,” "Shopping Centers Today,” “Franchise Times,” “Independent Banke,” and “Commercial Investment Real Estate” among others. The Storage Facilitator is a self-storage blog managed by SpareFoot and hosted by partners SelfStorage.com .