I recently assembled a roundtable of real estate experts to discuss the state of self-storage in the north-central region. I’ve asked them to comment on the state of the industry market in their areas and share their thoughts on how the industry will perform in the future. Joining us in the discussion are:
- Bruce Bahrmasel, Landstar Realty Group, Chicago
- Robert Brehmer, NAI Daus, Cleveland
- Larry Goldman, RE/Max Best Associates, Overland Park, Kan.
- Chris Hitler, Investment Real Estate Specialists, Mequon, Wis.
- Greg McDonald, Magnum Real Estate, Minneapolis
- Jim Soltis, Preview Properties.com, Brighton, Mich.
How have self-storage occupancies and leasing activity held up over the last year? What’s your prediction for the next six months?
Bahrmasel: In most markets in Illinois, the last year showed declines in occupancy and rent. In the past few months, there has been a turnaround in these areas, but it’s possible the increases are seasonal. The next six months will tell us whether the recovery will hold up.
Brehmer: Throughout Ohio, occupancies seem to be holding up, with the exception of projects that should not have been built. Rents are flat, and leasing activity is pretty much consistent. Some owners reported an increase in short-term business due to homeowner foreclosures.
Goldman: In general, 2009 was a tough year for owners in Arkansas, Kansas and Missouri, with occupancies dropping and concessions increasing. The hardest-hit areas were vacation areas and communities where development and facility expansions got ahead of themselves and markets were overbuilt a few years ago. The strongest areas last year were ones that didn’t attract a lot of attention from developers or enjoyed a strong agricultural base. Nearly across the board, occupancies are coming back slowly in 2010.
Hitler: Business has been rather good for Wisconsin storage owners. A recent survey of 80 owners shows the average occupancy at 90 percent, which is a couple points lower than 2008, but certainly not a huge drop. Activity has picked up in the last three months but, historically, spring and summer tend to be stronger times of year than winter for most storage owners. It’s hard to say whether it’s an indication of stronger economic fundamentals or simply the cyclical nature of the business.
McDonald: Self-storage occupancies in Minnesota have been flat or slightly declining over the last 12 months. Some owners expect to see a seasonal increase during the summer months, but many find that tenants are turning over at an increased rate.
Soltis: Throughout Michigan, there has been a reduction in occupancy over the last year for most operators. However, I did speak with a few owners who noticed a slight increase in the beginning of 2010. Many are trying to maintain their business by offering free rent concessions and other incentives until the market makes a recovery.
Are self-storage facilities in your market changing how they advertise?
Bahrmasel: Owners are certainly exploring ways not be tied to Yellow Pages ads. Internet-based alternatives are the most popular advertising methods, but social media hasn’t been explored very much by owners in Illinois.
Brehmer: Advertising methods in Ohio haven’t changed dramatically in recent months. Most facilities have some type of free-rent promotion while others offer free use of a moving truck. I’ve noticed an owner employing text marketing. The facility has a text number customers can dial to learn about the property. This type of advertising is relatively new and, along with social medial, will likely become a good way for self-storage owners to reach college students and other young customers familiar with the technology.
Goldman: I’m seeing little advertising activity in social media, but the shift from print advertising to Internet marketing is accelerating as owners are looking for more bang of their buck in their marketing budgets.
Hitler: Social media hasn’t yet caught on in Wisconsin, but more owners are using websites and search-engine ad words to advertise their facilities. Given the relatively strong occupancy levels, owners haven’t had to substantially increase the use of promotions to generate new rentals.
McDonald: Minnesota is slowly seeing a shift from traditional print advertising to more Internet advertising and other types of media such as TV and radio. Owners in the larger markets of Minneapolis and St. Paul are focusing most of their marketing resources on their websites, and some are trying social-media marketing. In the smaller markets of northern Minnesota, print ads in the Yellow Pages and newspapers, along with billboard advertising, are still the primary methods.
Soltis: In Michigan, several owners are promoting their facilities with free rent concessions. Owners are always looking for additional ad venues to increase traffic, but it may take a while before these alternative sources become their primary advertising methods.
As we see large investors re-enter the acquisitions market, should potential sellers hold off for a while longer, or is now a good time to sell?
Bahrmasel: Many potential sellers in Illinois have seen their values erode over the past couple of years and, as a result, they may not be able weather the next trauma. They’re concerned about getting reasonable financing when their loans come due, and worried that higher interest rates may devalue their properties further. If they’re thinking about selling, they may want to do something sooner rather than risk uncertain circumstances later.
Brehmer: Selling is a timing issue. Some owners seem to be motivated by projected capital-gains changes, others by financing rolling over. Owners who are considering selling should consult a qualified real estate professional to make sure they understand all the market factors before deciding on the timing that’s best for their situation.
Goldman: The seller’s individual circumstances should be the deciding factor. There’s not a lot of transaction velocity in this area, but there wasn’t much velocity even a few years ago when financing was looser, as sellers were not eager to part with their storage projects. The concern I have going forward is the threat of inflation and significantly higher interest rates.
Hitler: Transaction activity has slowed down 30 percent to 40 percent in the previous 12 months due to a difficult lending environment and unrealistic seller expectations on property value. These factors, coupled with near historic lows in financing, have created pent-up demand among strong, well-qualified buyers for appropriately priced facilities and, consequently, a very favorable selling environment. In addition, owners who are likely to sell in the next 12 to 18 months should accelerate those plans, because it appears capital-gains taxes will be increasing next year and will reduce the after-tax proceeds sellers keep.
McDonald: The gap between buyers and sellers appears to be widening. Sellers need to be realistic about the value of their facilities and acknowledge the higher levels of vacancy and higher cap rates when pricing their facilities. It’s still a buyer’s market and will be for quite some time. Sellers should consider all these factors, along with their personal objectives, before deciding to sell or hold.
Soltis: There seems to be a reasonable number of investors in Michigan looking at deals from $500,000 to $3 million. Sellers should base their decision to sell or hold on the prevailing cap rates in their markets. We can offer property at below a 9 percent cap rate, but it would have to be a class-A facility with good actual upside.
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 [email protected].