Store Wars: The Saga ContinuesA development update on self-storage in Phoenix

December 1, 1999

4 Min Read
Store Wars: The Saga ContinuesA development update on self-storage in Phoenix

Store Wars: The Saga Continues

A development update on self-storage in Phoenix

The Phoenix real-estate market is in its sixth year of a flourishing self-storage boom.The most elusive element with any cycle is knowing when it has reached its peak and theslide downward has begun. With more than 200 people per day moving to the Valley, storagedemand soars. The number-one threat to real estate has always been oversupply, which putsdownward pressure on rental rates, occupancy and net-operating income. Investors thenbegin applying higher cap rates, resulting in lower values for your facility.

So, where are we in the latest self-storage cycle? There have been three major decadesin the history of the Phoenix self-storage industry. The '70s, '80s and '90s were each adistinct period. It's important to review the history of each to understand where we areheaded.

In the Beginning...

The birth of self-storage in Phoenix began in 1970 and continued for a decade.Averaging annual additions of 400,000 square feet, while reaching 2.6 square feet perperson, a healthy industry developed.

The 1980s: Boom and Bust

The 1980s boom began in 1982 with the abundant flow of syndication capital. The rumbleof self-storage construction was heard throughout the Valley as 6.7 million square feet(more than one million square feet per year) was added to the base. An incredible all-timerecord was established in 1985 with the erection of 37 facilities totaling more than twomillion square feet. The '80s topped out in 1987 with an all-time record supply of 5.38square feet per person. The bust hit in 1988 with the Savings-and-Loan failure and thelack of available capital. The bust lasted for nearly seven years and yielded almost noconstruction.

The Roaring '90s

The roaring '90s came alive in 1994 with the revival of construction. There was pent-updemand in many parts of the Valley. Interestingly, more than 50 percent of the newconstruction in 1994-1995 was by first-time self-storage developers. In fact, during the'90s, there have been 27 facilities opened by developers new to the industry. Constructioncontinued to grow throughout the decade with annual construction nearing one millionsquare feet since 1996.

So where does 1999 fall in the cycle and where will the new millennium take us? Six newproperties have opened in 1999, and 12 more are under construction. More alarming are the21 that broke ground in the second half of the year and another 46 proposed for thefuture. More than one million square feet of storage was added during 1999. Despite all ofthe fears associated with overbuilding, the current overall occupancy rate remains near 80percent.

The Battle

The unprecedented growth in new residential construction and the increase in populationis driving the current cycle of self-storage construction. Population increases of 80,000per year create an absorption level of 320,000 to 400,000 square feet. So why are weadding one million square feet annually, and will this create an overbuilt situation?

It seems that the self-storage industry is increasingly viewed as a niche business. Wemust, therefore, look at the submarkets rather than the overall market. Developers andoperators have replaced their three- to five-mile competitive analysis and are focusingmore frequently on a two- to three-mile competitive radius. Successful developers areemploying more sophisticated tools in their site selection. Global positioning,system-based demographics and competitive analysis are now common. On the surface, itseems that self-storage has been overbuilt. However, some of our older space isfunctionally obsolete and is being replaced by state-of-the-art product. The new productoffers features such as climate control and advanced security features.

It appears that the real-estate axiom of "location, location, location" is infull gear in the Phoenix market. An audit of successful new stores finds high absorptionrates for well-selected sites with lagging leaseup in poorly positioned properties. Onestore filled completely in five months with another currently leasing three per day. Onthe other hand, there are stores that have been open for two years that are having realdifficulty reaching their lease-up projections. Competing objectives present a challengefor the independent developer. While the independent developer seeks a site based upon aninitial desired return, the national REITs sometimes are driven by the desire to increasemarket share.

As we enter the new millennium, only one thing is certain: The self-storage industrywill be shaped by its developers and owners. Development planned solely for the "highreturns offered by self-storage" must give way to responsible development indemand-driven niches. Development returns on new properties, as well as the value ofexisting facilities, are sure to decline from the high levels of the recent past unlesssound fundamentals replace speculative overbuilding. Let's hope for the pursuit ofresponsible development, which remains well focused and selective.

Kent Greenwald is a first vice president of CB Richard Ellis Self Storage Advisors,which has participated in the sale of more than $350 million worth of self-storageproperties. Mr. Greenwald may be reached at (602) 735-5519.

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