A Self-Storage Outlook

May 1, 2001

7 Min Read
A Self-Storage Outlook

The Fabulous San Francisco Bay Area

By R.K. Kliebenstein

The San Francisco Bay is 50 miles long, from three to 13 miles wide, and isentered through the Golden Gate, a strait between two peninsulas. The city is onthe southern peninsula, while on the northern peninsula are the residentialsuburbs of Marin County. On the eastern shore of the crescent-shaped bay aresuch industrial cities as Alameda, Oakland, Berkeley and Richmond. The SantaClara Valley, part of a great depression parallel to the coast, is the landwardextension of the bay. Angel Island, Alcatraz and Yerba Buena Island are in thebay itself.

The San Francisco Peninsula not only holds the city, but also some of theoldest and most elite suburbs of the Bay Area. These suburbs, including SiliconValley and San Jose, can be found to the south of the city. Attractions of thearea include The Cannery, Pier 39 and the Santa Cruz Beach Boardwalk.

A drive across the Bay Bridge to East Bay will take you to the lively townsof Oakland and Berkeley. Even though 30 years have passed since the politicaluprising, Berkeley still remains the national symbol of political and socialactivism and, most important, it still upholds its idealistic spirit.

The pure, unspoiled beauty of the coast of Marin County greets the visitorwho ventures across the famous Golden Gate Bridge. Besides the natural splendorof the mountains, Redwood forests and the ocean, there are also some affluentsuburbs in the county, such as Sausalito. Marin offers attractions such as thePoint Reyes National Seashore and Muir Woods wilderness.

The scenic wonders may lure some, but the tranquility of the wine-growingregions of the Napa Valley attract many. Within an hour's drive from SanFrancisco, the prestigious wineries of the valley offer unique opportunities totaste wines of superb quality and dine in even finer restaurants. The SilveradoTrail that passes through the Napa Valley provides an ideal view of the sceneryof the wine country. The Sonoma Valley affords a break from city life with itsrural, informal atmosphere.

The Bay Area is at the cutting edge of the emerging global-informationeconomy, and is a leader in key indicators of success, including:

  • The highest percentage of fastest-growing small businesses in the country;

  • The highest concentration in the nation of people with college and advanced degrees;

  • More than double the average number of patents per employee;

  • The highest concentration in the nation of high-tech exports;

  • The largest concentration in the nation of major national-research universities and federal-research laboratories;

  • The highest Internet penetration of any U.S. region;

  • The highest density of venture-capital firms in the world, and the highest concentration of invested venture capital (35 percent of the U.S. total); and

  • A gross regional product of more than $200 billion annually.

This vibrant tourist area is also the home to one of the largest populationcenters in the United States. Self-storage is no less important in the Bay Areathan in any major U.S. metropolitan area. With a population of more than 6million, this is one of the major U.S. self-storage markets.

A Self-Storage Outlook

Bill Kenney is an attorney who has been involved in developing real estatefor about 25 years and self-storage for almost 20 years. Kenney owns and managesfacilities in the San Francisco Bay Area. He has been president of the nationalSelf Storage Association as well as its Western region division, and hasparticipated in numerous conferences and panels regarding storage matters. Hetells us:

The Northern California storage market continues to be very strong. Theexploding growth in the San Francisco Bay Area led by Silicon Valley and SiliconGulch, continue to cause the multiplication of new businesses. These growthindustries have also generated a strong increase in population. Office rentalprices have been driven up by these new businesses.

The recent downturn in dot-com companies has caused a slight downturn in theoffice-rental rates in the major markets, but the release rate has been good.Large companies such as Cisco, Intel, Oracle and others continue to expand theiroffice space. Office rents in the Bay Area are now among the highest in theworld. This makes the alternative of storage very attractive. The office-rentalrates have also resulted in some existing storage facilities being sold togroups wishing to build offices.

Residential home prices and rental rates have also increased. The medianprice of homes continues to rise. This has put pressure on all land prices,making entry into the storage business more expensive. However, the higher landprices call for more density and smaller homes. The people in the smaller housesneed storage. These prices also have resulted in people commuting from outlyingareas to the core Bay Area business areas. Many people drive two or more hoursper day to work. This has caused an increase in the growth of areas outside theimmediate Bay Area. There has been growth to the south in Morgan Hill, Gilroyand Salinas, to the north in Santa Rosa and Windsor (though the Santa Rosa areahas become saturated) and to the east in the Brentwood, Antioch and Sacramentoareas.

The California energy crisis is now looming for the state, but it appears itwill be of minimal impact to storage operations because of the low use byfacilities of natural gas, where the major price increases are occurring. Itstill will be a factor.

Government has become more sensitive to storage issues, and some communitieshave placed moratoriums on new storage construction. This is beneficial toexisting owners in those communities by making entry into the business moredifficult and expensive.

The demand for participation in storage property in the form of investmentsis very strong as more people have become familiar with the industry and thepotential returns. This has helped as far as sales of existing facilities areconcerned, with sales going at very good capitalization rates.

The Pegasus Group, which currently owns and operates more than 50 facilitiesthroughout the United States, is headquartered in the Bay Area. Pegasus GeneralPartner Dwight Davis affirms Bill Kenney's comments:

The San Francisco Bay Area has been one of the hottest self-storage marketsin the United States in the last three years. Occupancies tend to be high andrents average well above $1 per foot. Obviously, with high rents and highoccupancies, there has been significant self-storage development in and aroundthe Bay Area. Some markets are beginning to reach saturation. Examples ofmarkets that are becoming saturated include Walnut Creek--with several newprojects recently opened and several large ones under construction--Concord,Tracy, Santa Rosa and, perhaps to a lesser extent, San Jose. Markets that areunderserved include San Francisco proper, the San Francisco Peninsula south toPalo Alto, and the San Ramon Valley from Danville to Pleasanton.

Land costs have accelerated in the last 24 months. Two years ago, land wasavailable at $5 to $12 per square foot. Today, land ranges from $12 to more than$100 per square foot. In most cities in the San Francisco Bay Area, entitlementswill be difficult. You can expect from six to 18 months to complete theentitlement process. Fees and requirements by local planning agencies may add $3to $10 per square foot to your overall costs. Then, there is the matter ofoff-site improvements: signalization, street widening, curbs, gutters and streetlights are a few of the additional costs developers face.

With all the negative information, though, there still seems to be anabundance of developers proposing deals in the San Francisco area. Currently,there are approximately 50 new storage projects in the planning or developmentstages in the San Francisco Bay Area and another 50 that have opened in the last12 months. As in any market, there are always good submarkets. Developers shouldcontinue to be aware of overbuilding and make their development choices wisely.

Carl Touhey, a local broker specializing in self-storage sales, has had veryfew new opportunities for the purchase of existing properties as sellers wereholding the investments and not selling. Projects that were of "B" and"C" class two years ago are now either sold or under contract asbuyers have acquired whatever seemed to be available.

I recall looking at acquisitions in the Fremont area two years ago, and whilethe market seemed at that time to have vacancies and new projects comingon-board, even those properties have leased up and are doing well. Cap rates arevery tight in the market for existing acquisitions, and properties stillexperience a frenzy of activity when they become available. All this is just anexample of how good the self-storage business is in this market.

R.K. Kliebenstein is a consultant with Coast-To-Coast Storage, whichprovides feasibility studies, acquisition and due-diligence services, as well asfinancing for self-storage projects on a nationwide basis. He can be reached athis South Florida home office at 561.367.9241.

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