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Self-Storage Real Estate in the South-Central States: Rental Rates and Economy Show Improvements

Over the past year, the self-storage investment market has continued to stabilize as financing has become more available in some markets. The industry is also experiencing a greater volume of sales transactions as buyers take advantage of low interest rates. Real estate experts from the south-central states discuss rental rates and occupancy trends, capitalization rates, and how the economy is affecting their individual markets.

Ben Vestal

September 18, 2012

6 Min Read
Self-Storage Real Estate in the South-Central States: Rental Rates and Economy Show Improvements

Over the past year, the self-storage investment market has continued to stabilize as financing has become more available in some markets. The industry is also experiencing a greater volume of sales transactions as buyers take advantage of low interest rates. The following real estate experts discuss rental rates and occupancy trends, capitalization rates and how the economy is affecting their individual markets.

  • Bill Barnhill, Stuart LaGroue and Shannon Barnes, Omega Properties Inc., Mobile, Ala.

  • Bill Brownfield, MKP Self-storage, Houston, Texas

  • David Etzold, Etzold & Co., El Paso, Texas

  • Jared Jones, Bauer & Associates Inc., Mobile, Ala.

  • Richard Minker and Tyler Trahant, CASE Commercial Real Estate, Fort Worth, Texas

Barnhill: The rental rate trend in Alabama and Mississippi has been predominantly flat over the last 12 months. Weve noticed that certain markets are experiencing more move-outs than usual when a rental-rate adjustment is made. The stronger markets are able to sustain occupancy without this sensitivity to rent increases.

Brownfield: In South and Central Texas, all of our clients have seen occupancy increases over the past 12 months, both in major markets and in secondary markets, and rental-rate increases have been the rule. Each major market has strong underlying fundamental economic growth, though the drivers are different in each of them.

Etzold: For our El Paso/West Texas markets, occupancies are holding strong in the mid-90s. New product is being planned and several projects are under construction.

Jones: Occupancy has been flat for the last couple of years throughout Oklahoma. Expansion projects have been put on hold while existing supply outpaces demand. Rental rates, however, have been increasing slightly, and many owners Ive spoken with plan on small rate increases in the coming year, which is an encouraging trend.

Minker: In North Texas, were seeing mixed responses to this question. While many of the mid-size operators have seen occupancy increase and have taken rental increases, some of the individual and smaller operators have had flat occupancy and are not increasing rates. This is more common with owners of class-B and C properties in older areas. We continually see operators adjust prices based on individual unit occupancies on a real-time basis vs. making across the board increases on all units.

Brownfield: South and Central Texas have seen a slight downward trend in cap rates due to supply constraints, but the spread between first- and second-tier markets has remained fairly consistent. In some cases, second-tier markets are still looked at rather skeptically by the larger lenders, but demand in these areas should improve through the end of 2012 as buyers look for better yields.

Etzold: In West Texas, demand for self-storage is such that cap rates for properties in second-tier markets are coming down more than 100 basis points to the 8.5 percent to 9 percent range. First-tier markets, like El Paso, are seeing rates in the 7.5 percent to 8 percent range for class-A product. The cap rate spread was more than 200 basis points a year ago, so theres definitely a compression happening among the different markets.

Jones: Were seeing cap-rate compression, especially in the Oklahoma City market where there has been a significant increase in transaction activity as compared to the last three years. Were seeing larger (40,000-square-feet-plus) stabilized, class-A properties selling for cap rates in the low 8 percent, and were currently marketing a three-property portfolio that may sell for sub-8 percent. The Oklahoma second-tier markets will continue to be 10 percent-plus cap rate markets with light activity.

LaGroue: In Alabama and Mississippi, were seeing a gradual compression of cap rate spreads between first- and second-tier markets. Overall, the region has seen a limited number of transactions, so its somewhat difficult to determine where cap rates stand at this point. Properties that are seeing lower cap rates in general are stabilized and not distressed or bank foreclosures.

Although were told that the economy is on the rise, hows the local economy in your area faring right now and how does that affect self-storage?

Barnes: Alabama and Mississippi are both seeing economic improvements in specific areas as manufacturing jobs are being created in Huntsville, Ala., and Canton, Miss. The region stands to benefit tremendously from the new Airbus-assembly plant that will be built in Mobile, Ala., beginning next year. The plant is expected to create 1,000 jobs at full production and 2,500 construction jobs as well. The neighboring states of Florida, Louisiana and Mississippi will also see a positive impact as more companies and suppliers will locate in the area. This should help the housing market and also increase occupancy in self-storage while generating more interest from potential self-storage investors in the area.

Brownfield: Houstons economy is firing on all cylinders, where more than 92,000 jobs were added during the last 12 months (a 3 percent employment gain). The good times could well continue for another three years. Austin is growing very nicely, too, for other economic reasons (high-tech is back), and San Antonio is benefitting from the Eagle Ford oil and gas projects. So, with each major market experiencing job and population growth, increasing occupancies and rental rate growth in self-storage should continue for the foreseeable future.

Etzold: The El Paso metropolitan statistical area is performing better than most markets as job growth, new housing construction and general business activity are on the rise. Expansion of the military base at Fort Bliss, continued investment in new retail development, and the added population migration of wealthy Mexican businesspeople bodes well for the overall economy and for self-storage in West Texas.

Jones: The Oklahoma economy has held up well, and the current 5 percent unemployment rate is one of the lowest in the country. The energy sector continues to do well and drive the local economy while the Oklahoma Real gross domestic product is forecasted to increase 3.4 percent from 2011. These positive indicators bode well for self-storage as companies expanding to meet additional demand will create jobs, which will in turn affect the housing and storage markets.

Trahant: The North Texas overall economy is still vibrant in large part due to the oil/gas drilling efforts in the region through the Barnett Shale. Over the past seven years, a large number of employers have opened operations in the area. The housing market differs by submarket, but overall, its a healthy environment with the mid-priced housing market continuing to exceed expectations. Self-storage operators should continue to see stabilized occupancies for the remainder of the year with seasonal adjustments.

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 protected] .

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