A strong housing market in many of the south-central states is giving self-storage operators an uptick in rental activity and enabling them to enact higher rental rates. In addition, many of these markets may be ripe for expansion as pent-up demand is at last being met. In this roundtable, industry real estate experts discuss trends in the south-central states, including current rental rates, the strongest markets across the region, and the major buyers. Participants include:
- Bill Barnhill, Shannon Barnes and Stuart LaGroue, Omega Properties Inc., Mobile, Ala.
- Bill Brownfield, MKP Self Storage, Houston
- Larry Goldman, RE/MAX Commercial, Kansas City, Mo.
- Jared Jones, Porthaven Partners, Tulsa, Okla.
- Tyler Trahant, CASE Commercial Real Estate, Fort Worth, Texas
What are the recent rental-rate trends in your major markets? Are you seeing rates increase as the market continues to improve?
Barnes: Since our markets cover all of Alabama, Louisiana, Mississippi and Northwest Florida, the entire spectrum of rate changes is represented. The real estate investment trusts (REITs) and other larger operators have been able to make significant rental-rate increases in some markets. Generally speaking, however, only modest increases are being made by smaller operators in secondary or tertiary markets. In those areas where the economy is improving, there should be reasonable opportunities to raise rental rates.
Brownfield: My major markets include Austin, Houston and San Antonio, Texas. All three continue to see population and job-growth gains that support good growth in each local economy. Rental rates are increasing in each at steady and sometimes enviable levels. Of the three, Austin is probably seeing the highest percentage increases due to occupancies above 90 percent and greater zoning constraints, which limit new development.
Goldman: Rents and occupancy rates are improving throughout Arkansas and, really, most of this region. Residential real estate activity is making a strong comeback, and consumer confidence is vastly improving. Little Rock was recently named the No. 1 place to live by Kiplinger Personal Finance, and Northwest Arkansas has made a significant resurgence as well.
Jones: Rates in Oklahoma are moderately rising. Weve seen rental-rate increases of 2 percent to 3 percent from most operators, with some owners seeing a 6 percent escalation. Rental-rate growth is becoming more important to preserve the operating margins of owners, as we have seen significant increases in insurance premiums within the last few years due to the insurance companies sustaining large, weather-related losses.
Trahant: In northern Texas, were seeing discounts slow down a bit and rates being pushed in certain markets. Of course, there are always those areas with stiff competition that will have leasing incentives present for a while to come. Occupancies in most areas are strong at this time, but this is partially due to the seasonality of the business.
What markets in your territory present a good outlook for self-storage?
Brownfield: Houstons housing growth is very strong in perimeter markets in all directions and particularly strong to the north and west suburbs. Housing stock is also being added to the south and east markets, so most of these are natural targets for expansion of existing facilities and new development. Inside Loop 610, thousands of new apartments are under construction, so there are selective opportunities for storage there, though land prices are much higher. Occupancy in most of Austins self-storage is well above 90 percent. In the northwest, west and southwest, occupancy is near 100 percent. These markets are growing in population, so self-storage growth is planned and under way.
One of my clients is concerned about the level of new development and predicts Austin could be overbuilt within two years if entitled projects are all built. San Antonio markets are seeing good growth as well, particularly in the north, northwest and northeast suburban markets. Occupancies at class-A and -B facilities are very strong, and a number of new projects are under way or in the planning stage. Most of the growth is coming from strong local operators/developers and regional players, though theres strong interest by large national players for denser submarkets that meet their acquisition requirements.
Goldman: The best risk-adjusted opportunity for storage is under-managed facilities with room for expansion. Over the past 18 months, Ive seen some remarkable success stories in Arkansas, Kansas and Missouri. I can think of several lease-up situations where the buyers have driven occupancies up from well below 50 percent to more than 80 percent in less than a year, generally by exercising simple yet disciplined steps.
Jones: The Oklahoma unemployment rate is 5.2 percent, well below the national average of 7.4 percent. The state has seen single-family residential permitting up 37 percent in June 2013 from 2012. Weve seen significant demand in the Oklahoma City metro area from contractors working on large oil and gas projects, along with a trickledown effect from the Moore tornado, which destroyed 1,150 homes. In Oklahoma City, there are several new projects and big-box conversions under way, which should help satisfy some of the demand from these forces. The Tulsa metro, historically seen by most outside investors as overbuilt, is stabilized based on the latest market survey. Weve seen one new project, some expansions and a new conversion since the beginning of 2013.
LaGroue: Within the south-central region, there are a few markets that present a good outlook from a development standpoint. For example, there are some pockets within the Jackson, Miss., market that are under served, and opportunity exists for development. We have such an opportunity in Brandon, Miss., whereby the facility has already been designed and approved. Currently, the city will not allow any more development of self-storage facilities, which makes this opportunity really attractive for someone to come in and build, knowing there are barriers to entry in place for other competitors.
Several cities and towns are still catching up with the supply that was developed prior to the recession, and it will take some time for things to stabilize. In some areas, specifically the secondary and tertiary markets, some pent-up demand does exist; however, each individual market needs to be studied carefully. Existing facilities have continued to stabilize and, in some instances, have begun expansion projects that had previously been put on hold over the last several years. As the economy continues to improve, well continue to see expansions of existing facilities as well as some new projects take shape in Alabama, Louisiana and Mississippi.
Trahant: Most of the growth in the Dallas/Fort Worth area is occurring in the northern portion of the metroplex areas. For example, Collin and Denton Counties have seen a population explosion over the past decade, and the urban sprawl has continued. As the residential market continues to improve in the area and new-home construction is rebounding, we expect to see additional self-storage development in these previously smaller markets.
What types of buyers are dominating purchases in your area (REITs, large operators, local owners, etc.)?
Barnhill: The REITs and large operators are predominant buyers in the higher-population demographic areas in Alabama, Louisiana and Mississippi, whereas small operators tend to represent the predominant buyers in secondary and tertiary markets.
Brownfield: In terms of impacting capital rates, REITs and large operators continue to pressure rates in Austin, Houston and San Antonio purchases, site acquisition and new development. Two examples: Public Storage is actively pursuing a number of new developments and site acquisitions in Houston; and Austin is seeing sub-6 percent cap rates for some class-A properties. In terms of buying activity, the greatest volume of purchases has been by strong regional players growing their platforms and buying the remaining value-add opportunities ripe for upgrades and expansion.
Since these major markets are so strong, there has been capitalization-rate compression of up to 100 basis points in secondary and tertiary markets elsewhere in Central Texas. But rates are still high enough to warrant consideration by smaller investors. This trend should continue for the foreseeable future, especially for communities still growing because of Eagle Ford shale activities. For long-term investors willing to hold beyond five years, I particularly like these markets since buyers can get decent, low, double-digit leveraged yields on the front end. Lenders are again showing interest in these markets, especially for well-located, stabilized properties and buyers who can put 30 percent or more down.
Goldman: In Arkansas and Missouri, were seeing more buyers from outside the industry diversifying into self-storage from apartments, ranch land and strip centers. Still, the majority of buyers are storage owners that are expanding their storage holdings.
Jones: In Oklahoma, the profiles of active buyers have been a mixed bag. Weve seen one private REIT very active in acquiring six properties since the beginning of 2012. The largest operator in Oklahoma picked up two properties within the last 18 months. SecurCare Self storage, the second largest operator, acquired a four-property portfolio. So far this year, a small operator bought two properties. An out-of-state operator made a splash in buying a three-property portfolio at the end of 2012. All other transactions have been local, one-off transactions with no publicly traded REIT activity.
Trahant: The REITs are actively pursuing opportunities in North Texas as well as regional operators. While there are few local owners with funds to invest, the 7 percent (or sub 7) cap rate typically is a market where the large funds or REITs are the only buyers.
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]; visit www.argus-selfstorage.com .