The State of Self-Storage Real Estate in the North-Central States: Recovery and Development

In this article, real estate experts from the U.S. north-central region discuss the state of self-storage, commenting on the market in their areas and their thoughts on how the industry will perform moving forward. The contributors are:

As the economy and real estate market start to recover, should owners consider selling, buying or holding their properties? How is recovery progressing in the major market areas in your state? 

Bahrmasel: As with any major change, self-storage owners should be guided first and foremost by personal goals. That said, the current economic climate is proving to be a good time for buying and selling. Interest rates remain quite low, enabling buyers to lock in rates that are favorable and give a good long-term return on investment. This condition is also helpful for sellers who wish to get the best price. Theyll probably be able to get in the near term, but as interest rates go up, investors will be forced to pay less for a project. In the greater Chicago area and surrounding markets, the economic recovery remains tenuous.

Goldman: Interest rates are still low, which really enhances investment value for buyers and helps sellers get better prices. As inflationary pressures surface in the not-so-distant future, we will be looking back at 2011 as a year of great opportunity. Furthermore, many facilities are seeing significantly improved performance, as consumers are under less financial pressure than during the worst of the recession.

Hitler: The Wisconsin market has heated up in the last couple months. For the past two years theres been a dearth of reasonably priced properties. Owners had been reluctant to sell given the perception of declining storage-facility values and limited investment options for their sale proceeds; but enough time has passed that sellers can no longer postpone the selling decision.

In addition, interest rates are still historically attractive, allowing buyers to give reasonable offers. The economy in Wisconsin has held on for the past couple of years. The state generally does not experience the economic swings of other states. Operators still averaged 90 percent occupancy throughout 2009. But things could be better, and like operators everywhere, they want the economy to get fully on track so concessions are minimal and rent increases are easier to pass on to customers.

McDonald: Operators in the larger Twin Cities region are only cautiously optimistic that a recovery is on the way. The owners of properties in smaller submarkets have only read that the economy and the real estate market are improving, but they are lagging behind.

For owners in major Twin Cities, markets that can afford to hold; I recommend they do. If their properties are operating at high economic occupancy, they should consider selling because there are plenty of buyers looking for a true and stable 9 percent to 10 percent return. Owners in the smaller second-tier markets should not hold out expecting to sell their property at a later date at an 8 percent cap rate because thats never going to happen. These owners should be happy to sell their properties if they can yield a true verifiable 9.75 percent to 11 percent cap rate.

Soltis: In Michigan, theres been a definite increase in activity in the number of sales. The decision to sell, buy or hold is individual in nature and dependent on both non-economic as well as solid economic factors. Properties that are well-maintained, well-located and have decent cash flow are trading in todays market. Most of the buyer interest seems to be in class-A and -B-plus properties. Were several years away from an economic turnaround in the Michigan market. We are rebounding, but not as quickly as other markets.

With the improvement in the market and strong performance of the self-storage sector during the recession, will we see new development of properties in 2011 and 2012?

Bahrmasel: It will be several years before we see new projects come on line. We still havent worked through the overbuilding that occurred in the last decade, nor are there a lot of banks willing to finance new, unproven projects. Acquisitions will probably be how the big guys get bigger for the next several years. Any construction in this industry may come in the form of expanding current proven locations rather than banks looking to finance new and untested projects.

Goldman: Were already seeing a couple of new projects in Kansas, but very little development activity elsewhere. In a way, this is good for the industry, as overbuilding was one of the most serious threats to storage investors throughout the country. The threat of overbuilding has been replaced by the threat of underperformance due to inflexible, weak management. This is a business that requires focus, discipline and flexibility, as competition has increased due to consumer belt-tightening. Thats to say were now threatened by reduced demand as opposed to increased supply, and that theme will probably continue at least through 2012.

Hitler: I suspect new developments will be difficult to fund unless youre an existing operator with a substantial net worth and strong banking relationships. The economy is still fragile, and banks want substantial assurance the business can support the additional debt from adding more units. Expansion of existing facilities will be more prevalent for the foreseeable future.

McDonald: It will be at least 2013 before we see any new self-storage development in Minnesota, with only strong infill locations as an exception. The self-storage industry did better than many real estate sectors, but its not immune to problems. Furthermore, new construction requires two years just to break even, which is not appealing to banks. If banks counter by requiring more cash up front, it will dilute returns and limit new construction. Thats an appropriate check and balance at this stage in the game.

Self-storage is now a matured industry with too much inventory in many markets. Most markets dont need more buildings, but rather they need the economy to continue to recover so tenants have more discretionary income and can lease the vacant space before we consider putting more supply into the market. I would advise investors not to build, but be patient and look for existing properties to buy at a reasonable price.

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].