I recently assembled a roundtable of real estate experts to discuss the state of self-storage in the Southeast. I asked them to comment on their local markets, including occupancy levels and pricing. Joining us in the discussion are:
- Allen Barnhill, Omega Properties Inc., Atlanta
- Bill Barnhill, Stuart LaGroue and Shannon Barnhill Barnes, Omega Properties Inc., Mobile, Ala.
- P. John DeStefano, Commercial Investment Group LLC, Charleston, S.C.
- N.J. “Joey” Godbold, Percival McGuire Real Estate, Charlotte, N.C.
- Grady Riggs, Long and Foster Real Estate, North Bethesda, Md.
- W. Frost Weaver, Weaver Realty Group, Jacksonville, Fla.
1. Why is the Southeast a good place to invest in self-storage at this time?
Allen Barnhill: Self-storage offers a great combination of risk and return for a real estate investor. Over its history, and even more important, through the recent economic upheaval, self-storage has proven to be one of the most resilient and consistent performers of any commercial real estate investment category.
DeStefano: The root causes of the current economic downturn are the same factors that drive demand for self-storage (loss/change of job, downsizing household, etc.). Self-storage has proven to be somewhat resilient over the past 18 months compared to other property types (retail, office, multi-family, residential). Self-storage is also well-positioned to recover more quickly than other property types that are dependent on job growth and economic stimulus.
Godbold: We’re seeing self-storage holding up well in this market compared to other real estate investments. While occupancy rates and collection issues are haunting operators, the industry hasn’t been hit as hard by the recession as most office and retail products. Investors are disenchanted with the stock market and are looking for more tangible and predictable investments, and they see that in self-storage.
LaGroue: Potential investors should purchase self-storage properties because, as a whole, the storage sector has continued to outperform almost all other asset classes of commercial real estate and will most likely continue to do so. Self-storage has certainly felt the pains caused by the recession with declines in occupancy and income figures.
However, it has not been affected as badly as retail, office and industrial, and I don’t anticipate that it will. There will also be some buying opportunities from owners or sellers who have upcoming maturities they are unable to refinance due to a lack of funding.
Riggs:Historically, we know self-storage owners tend to sell only when they experience life-changing events, and their decisions are not driven by the commercial real estate market. Entry barriers are generally high for self-storage projects, so as long as an investor can get financing, a well-placed and managed facility is still a good, solid cash-flow generator.
Weaver: There are two primary categories of self-storage properties today, and different types of potential investors. Class-A self-storage properties can provide a stabilized cash flow with less risk than other types of commercial properties. In general, the price for these properties is less than replacement cost.
There’s a broad second category of properties that have experienced decline in occupancy based on the economy and the significant decline in new housing starts. These are not returning a net income that can be capitalized, but can be purchased at prices significantly below replacement cost. For the entrepreneur, there is significant upside as the economy in the local area improves.
2. Has there been any major shift in occupancy or rental rates in the Southeast states? What are the current self-storage rental rates in your major market areas?
Allen Barnhill: In speaking with owners and managers throughout Georgia, we’ve found, on average, occupancy and rental rates are down but not dramatically. Many owners have continued to add customers and hold steady on rental rates. Common factors for these facilities are good location, supporting demographics, viable local economy and strong management. Climate-controlled 10-by-10 units range from $90 to $125 per unit, and 10-by-10 non-climate-controlled units range from $50 to $75 per unit.
Bill Barnhill: With the exception of some specific overbuilt markets, rental rates have generally held steady, although more concessions are being offered. Overall economic rental rates are lower by as much as 10 percent in some areas. In the Florida Panhandle, a 10-by-10 climate-controlled unit will bring $100 to $125. Regular outside units are in the $60 to $65 range.
DeStefano: Of the 10 properties we’re managing or actively marketing for sale in South Carolina, the general trend has been a drop in occupancy of 5 percent to 10 percent. Rates, however, have held steady. The actual performance is reflective of proactive facility management. We have a couple of facilities that have actually experienced rate and occupancy growth over the past 12 months, while competing facilities have seen declines.
Godbold: Owners in North Carolina are indicating that occupancy rates are down somewhat, depending on local market conditions such as unemployment and general demographics. Many managers report a loss in the vicinity of 10 percent from 2007 occupancy rates. That, however, is compounded by an increasing problem with collections.
Many operators are being more lenient with evictions and lien sales as they try to retain tenants—often long-term and loyal tenants. We have not seen operators move to decrease quoted rates, though many are offering specials.
Riggs: In the mid-Atlantic states, occupancy rates are down across the board 10 percent to 15 percent as economics are forcing customers to shed expenses. Rental rates haven’t really changed, but owners are giving more concessions like free rent or even free one-day truck-rental rebates for new customers.
Weaver: There has been a significant downward shift in occupancy in some areas in North and Central Florida. This has been impacted by the lack of new housing starts and self-storage tenants who’ve vacated their units for economic reasons. Rental rates have been maintained, but many facilities are offering discounts as an incentive to new tenants.
For class-A properties, a 10-by-10 standard unit is $65 per month, and a 10-by-10 climate-controlled unit rents for $80 per month. In the smaller markets, the rental rates are typically 10 percent to 15 percent less.
Michael L. McCune 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.