In this roundtable discussion, self-storage real estate experts discuss trends they’re witnessing in the north-central states, addressing issues of facility development, sales and capitalization rates. Participants include:
- Bruce Bahrmasel, Land Star Realty Group Inc., Lincolnwood, Ill.
- Larry Goldman, RE/MAX Commercial, Kansas City, Kan.
- Mike Helline, Gristanti Group Commercial Real Estate, Louisville, Ky.
- Jim Soltis, PreviewProperties.com, Brighton, Mich.
- Max Schultz, Siegel-Gallagher Inc., Milwaukee, Wis.
Are you seeing any self-storage development trends in the north-central region? How might the new supply of product affect market occupancies?
Bahrmasel: In Illinois, there isn’t a lot activity with new, out-of-the-ground projects. Conversions are happening frequently, as owners seek ways of squeezing value out of existing assets. There’s been a big uptick on expansion of existing projects, so that down the road, expansion capability has real value. Overbuilding is always an issue, and the increase of supply may hold down rental rates or increases. Expansion will have a tendency to rent up quicker than out-of-the-ground projects because all the marketing mechanisms are in place and, presumably, owners wouldn’t be expanding unless they’re near capacity.
Goldman: In Kansas and Missouri, there’s a lot more talk of conversions than anything else. We’re seeing more expansions of existing facilities than ground-up developments. Conversions seem to be a quicker way to develop new locations without having to feed a ground-up development during the lease-up. We’re always concerned about overbuilding, but as far as I can tell, there aren’t a lot of new, conventional facilities coming out of the ground in my area.
Helline: In Kentucky and Tennessee, we’re seeing climate-controlled units become a bigger portion of facilities that are expanding. However, very few new, ground-up facilities are coming online. Expansion of existing properties will be the norm for the near future. There are markets in Kentucky (Lexington and Louisville) that have the ability to absorb more development. Tennessee has an overabundance of small facilities8,000 to 10,000 square feet—which would be negatively impacted by an overbuilt market.
Schultz: In Wisconsin, buyers are searching for redevelopment and conversion opportunities in growing submarkets in urban areas where multi-story warehouse conversions are common. In secondary and suburban markets, expansion of existing facilities seems to be the current trend. Generally, it seems as though the additional units coming to market are in line with the increasing demand by end users. Market occupancies remain in the high 80th to 90th percentile in quality properties, and urban and suburban population is rising.
Soltis: In Michigan, we’ve seen little new development, but if occupancy remains high in a market, I expect to see expansion first because certain properties can be expanded. That’s a feature that’s actively being considered. Climate control is considered for most of the properties if it will enhance the bottom line and there’s a demand. The impact of overbuilding is based on the continued strength of the economy and specific market. If a market is overbuilt, then occupancies will drop and prices will soften. I’m seeing owners raising prices gradually throughout Michigan.
What’s the spread in capitalization (cap) rates between urban, suburban and rural markets in your area?
Bahrmasel: In Illinois, we‘ve seen some urban projects priced at a 6 percent cap rate and outlying projects as high as an 11 percent cap rate. The range is wide and really comes down to the merits of the individual project.
Gallagher: In Wisconsin, we generally see cap rates for urban properties range from 6 percent to 7.5 percent. Suburban properties can be in the range of 7 percent to 8.5 percent, and rural properties see cap rates from 9 percent to 10 percent. Other property factors such as the quality, location or features can impact the cap rate from there, but these are a general rule of thumb.
Goldman: Suburban and urban cap rates have a closer correlation in the major market areas in Kansas and Missouri, with suburban commanding a slightly higher premium in value. Rural facilities are going to trade at discounted values that are going to be dictated by the remoteness of the surrounding area. There is a least a 200-basis point spread between cap rates for a facility in a primary market versus one in a tertiary market, perhaps more. The features of class-A facilities versus class-B and -C are really driven by consumer preference in the particular submarkets. For example, in some areas, climate-controlled space can command a 100 percent premium, while in other areas there’s less than a 20 percent premium.
Helline: Throughout Kentucky, South Indiana and Tennessee, we see cap rates for urban markets around 7.5 percent, suburban markets at 7.5 percent or more, and rural markets trade around 9 percent to 10 percent.
Soltis: Michigan markets are seeing cap rates range from just below 8 percent up to 10 percent. Class-A and -B-plus properties are trading at around 8 percent, plus or minus; class-B and -C properties at 9 percent, plus or minus; and rural, class-C properties at 10 percent, plus or minus.
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@example.com; visit www.argus-selfstorage.com.