This month, I gathered a roundtable of experts to discuss how the storage industry is faring in the Southeast. Lets hear what they have to say about their respective cities and regions. Our roundtable panel includes: Bill Barnhill and Stuart LaGroue, Omega Properties Inc., Mobile, Ala., representing the Florida Panhandle; Dale Eisenman, Midcoast Properties Inc., Hilton Head Island, S.C., representing North Carolina, South Carolina and Georgia; Malcolm MacLeod, The Huntington Group Inc., Palm Beach, Fla., representing South Florida; and Frost Weaver, Weaver Realty Group, Jacksonville, Fla., representing North and Central Florida.

Cap rates are beginning to tick up in some areas. What trends are you seeing in your area?

Eisenman:

Cap rates remain stable, but theres a growing impression we may start to see them increase if long-term interest rates rise.

LaGroue:

Cap rates have been holding steady in the 8 percent to 9 percent range. I believe with rising interest rates, well see cap rates follow. Its not going to be drastic, but the overall cap-rate range will be affected.

MacLeod:

Southeast Florida is still such a hot market that sellers think their properties are worth more than they really are, and commercial deals are being presented at low cap rates.

However, most Realtors sense a slow-down in the market, and commercial and residential properties are staying on the market longer, meaning sellers have to be more realistic about their asking prices. Based on projects Ive seen, I sense cap rates are starting to skew higher.

Weaver:

While cap rates are a useful tool in our industry, theres a difference in how they are being used by sellers and buyers. Sellers are continuing to be very aggressive in their asking prices, based on listing prices for properties around the country. Therefore, most quality facilities are still being listed based on a 7 cap rate or lower.

However, buyers are looking at a leveraged return on investment. As interest rates begin to rise, this negatively impacts the cash flow of the property. Therefore, buyers are being more conservative in their offers. In our area, this has caused a wider spread between the asking price and what is being offered, making it more difficult to consummate these transactions.

What is the general consensus in your territory about the threat of overbuilding?

Eisenman:

Owners in the Carolinas and Georgia, as in most markets, are concerned new competitors will add more capacity than needed, especially if they neglect to do their homework on supply and demand in the area. Overbuilding creates a downward pressure on pricing. Some owners are concerned industry conferences and some seminars might promote building to the detriment of existing and future owners.

LaGroue:

People are interested in entering the Florida markets. Ive spoken with interested parties from nearby states as well as California, Colorado and others in the West. Construction costs and insurance rates have drastically increased and that, along with the threat of overbuilding in some areas, may make potential developers and investors more cautious when moving forward with their plans. However, a phenomenal population growth is still being experienced in the Florida panhandle, and that should keep projects moving forward despite the increase in development costs.

MacLeod:

It doesnt appear that overbuilding is a big concern for storage developers in Southeast Florida right now. Several projects have been recently completed or are under construction in Palm Beach County, and all appear to be doing fairly well. The area has thousands of new residential units being built and none will have basements, which should lead to increased demand for storage space. Numerous people have asked me about properties available for storage development, so it appears business is good.

Weaver:

The supply and demand for self-storage varies significantly in Central and North Florida. Generally, theres more oversupply in urban areas and a stronger demand in the smaller markets, but this isnt universally true.

For instance, in Jacksonville, the self-storage market could be characterized as stable and growing. According to the 2005 Self-storage Almanac, there are 138 facilities in the city comprising 5.1 million square feet. Even though numerous facilities have been recently completed or are under construction, the city is considered undersupplied according to national standards.

Another example is Gainesville. Its a smaller market but has a large university, and the city is growing rapidly. There are 39 facilities in Gainesville. Occupancy is in the high 80 percent range on an annualized basis, but there are seasonal influences from the student population. Rates are lower than in some other markets and are obviously influenced by the student body.

Are you seeing more non-storage owners interested in buying facilities? Why or why not?

Eisenman:

Theres a steady stream of new investors interested in the industry for the same reasons anyone, past or present, has found it attractive. Unfortunately, many seem to underestimate the challenges associated with the business, particularly the on-site and off-site management component. Conceptually, self-storage isnt vastly different from other commercial real estate investments, but the devil is in the details. Its increasingly importantand difficultto provide the services customers value, and to do so on a daily basis.

LaGroue:

The inquiries remain steady, and I expect the trend to continue throughout 2006 due to high population growth in the Gulf Coast. The key thing buyers are looking for is room to expand, and thats what Im most frequently asked about.

MacLeod:

Ive had numerous calls from current owner/operators and first-timers looking for facilities in South Florida. Our economy here is somewhat different than other parts of the country because we have a constant influx of new residents; most are retirees or second-home buyers. As a result, probably 50 percent of buyers arent part of the traditional workforce; with all of the baby boomers reaching retirement age and inheriting money, we expect to see continued growth for a long time.

Weaver:

A few years ago, many inquiries came from outside the industry. That hasnt been the case in the past year. Nearly all have been from investors and developers already in self-storage who are looking to expand their portfolios. These buyers are highly focused on property location, area demographics and the presence of competition.

Are you seeing rental-rate increases in your market? What about occupancies?

Eisenman:

Rental rates and occupancies vary from location to location, so its risky to make any general observations. However, it seems rates and occupancies are stable.

Barnhill:

The coastal areas of Florida have experienced rate increases and excellent occupancy, partially due to the 2004-05 hurricanes. Notwithstanding increased need created by the storms, the Florida Panhandle has an underlying demand that should secure steady occupancies. Inland, the rates vary by city. Generally, they appear to have increased slightly in larger metropolitan areas, and remain unchanged in rural locales.

Weaver:

Due to oversupply in most markets, rates havent increased much in the past year. In smaller markets, even where demand is strong, owners seem to be content with their rents and are reluctant to raise them for fear of losing local customers. Location plays a big part in rates. For example, in Jacksonville a 10-by-10 unit rents from $69 to $100, whereas in Gainesville that same unit is $54 to $65.

Is bank financing available in your area for buyers and new construction? What would terms look like?

Barnhill:

Bank financing is available for purchase and new construction. Bankers are not only scrutinizing the property, theyre requiring either an existing banking relationship or the purchaser have some experience in the storage business. Banks typically require 25 percent to 30 percent equity for a purchase, with interest rates around 7 percent to 7.5 percent for five-year money.

Eisenman:

Financing is available and the terms vary, in part, with the size of the loan and whether its for an existing facility or new construction. You can get fixed-rate financing for stabilized and sizable properties, usually tied to the Treasuries. Many nonrecourse borrowers are seeing rates ranging between 120 and 160 basis points over the 10-year Treasuries, amortized for up to 30 years, with loan-to-values of 75 percent to 80 percent. Banks will often offer recourse or partial recourse loans with either a variable or fixed rate, but prepayment penalties likely will be more liberal than nonrecourse loans.

Financing for self-storage is readily available, but the best loan for a borrowers needs and objectives may not be available from every lender. I encourage borrowers to seek professional guidance. Again, the devil may be in the details.

MacLeod:

Bank financing is available in my market. A recent project I worked on had the following terms: 80 percent loan-to-value (LTV), 10-year fixed interest rate, 30-year amortization, 130 to 140 basis points over the 10-year treasury, one-point fee, nonrecourse.

Weaver:

Bank financing is most often used in the acquisition of existing facilities with redevelopment or expansion opportunities. The terms are generally as follows:

Michael L. McCune has been actively involved in commercial real estate throughout the United States for more than 20 years. Since 1984, he has been owner and president of Argus Real Estate Inc., a real estate consulting, brokerage and development company based in Denver. In 1994, he created the Argus Self Storage Real Estate Network, now the nations largest network of independent commercial real estate brokers dedicated to buying and selling self-storage facilities. For more information, call 800.55.STORE; visit www.selfstorage.com.