Oil Boom Fuels Interest From Self-Storage Investors

The U.S. oil industry is producing new hot spots for growth that are sparking the interest of self-storage investors. In this article, self-storage professionals discuss barriers to entry and the long-term outlook for investors looking to tap into these markets.

December 27, 2013

6 Min Read
Oil Boom Fuels Interest From Self-Storage Investors

By Beth Mattson-Teig

Reprinted with permission from "The Storage Facilitator" blog.

The U.S. oil industry is producing new hot spots for growth that are sparking the interest of self-storage investors. In Texas, North Dakota, New Mexico and certain parts of Ohioreally anywhere there is an oil boomwe have seen incredible demand for self-storage products, which has led to increased net operating incomes and increased values for properties, said Ben Vestal, president of the Argus Self Storage Sales Network in Aurora, Colo.

An oil boom often produces a ripple effect of positive economic growth across a region. The surge of workers pouring into an area to service the oil industry typically creates a need for more infrastructure and services, ranging from housing and grocery stores to restaurants and hotels. That growth is driving development in some markets where, frankly, there hasnt been any new self-storage construction in years, Vestal said.

North Dakotas oil boom is putting the state on the map for potential investors. Closing in on 1 million barrels a day, North Dakota now ranks second only to Texas in oil production. We think there are significant opportunities there, said Peter Elzi, a principal at land planning firm THK Associates Inc. in Aurora, Colo.

THK has conducted self-storage market analysis for clients whove been eying potential investments near the Bakken shale in western North Dakotaspecifically in the cities of Dickinson, Minot and Williston.

Existing self-storage units in those three cities are pretty much 100 percent occupied, with a number of facilities reporting theyve got waiting lists, according to Elzi. In addition, most of the existing facilities are quite old, with gravel and dirt parking lots and few amenities. Furthermore, few units in the area are climate-controlled, which Elzi said is mind-boggling, as the region experiences temperature extremes in the summer and winter. All of those markets are in great need for new, modern facilities, he added.

North Dakotas rental rates arent high by national standards, largely because of the age of the facilities. In Minot and Dickinson, average monthly rents are 50 to 60 cents per foot. The Williston area is commanding slighter higher rents, as thats where much of the significant growth related to the Bakken shale has happened. Self-storage facilities in that area are seeing monthly rents average about 75 cents per foot, according to THK, with some newer facilities commanding rents up to $1.30 per foot.

Long-Term Outlook

A key question for investors is whether this oil-fueled growth is sustainable. Oil markets are notorious for their boom-and-bust cycles. Historically, oil booms have lasted five to 10 years. In the Bakken, we firmly believe this is not a five- or six-year cycle, Elzi said.

Based on current technology, companies are drilling at a rate of 2,500 wells a year, with the total amount of accessible oil reserves estimated at 50,000 to 80,000 wells. That puts the drilling timetable for that oil at 20 to 30 years.

Texas has long been a leader in the oil industry, and the heart of the current growth is the Midland-Odessa area of West Texas. The region has been recognized as one of the fastest-growing metro areas in the United States. It was that growth that prompted real estate real estate investment trust (REIT) W.P. Carey Inc. to buy four properties in Midland-Odessa a year ago. The four properties comprise 2,541 units and span 361,940 net rentable square feet.

Despite the Midland-Odessa areas growth, W.P. Carey did a significant amount of due diligence before committing to the deal. The company was wary of investing in an oil-driven economy.

If you are a long-term holder, like we are, you want to make sure there is sustainability there, and its not just a five-year boom and then you have problems on the downside, said Ann Coolidge Taylor, managing director in the Dallas office of W.P. Carey. The REIT holds ownership stakes in about 170 self-storage facilities in the U.S.

One factor that helped put W.P. Carey at ease with the West Texas acquisition is new hydraulic fracturing, or fracking, technology. Some data suggests fracking makes it economically feasible to drill even if the price of oil were to drop by up to 30 percent, Taylor noted. In addition, the area is also seeing new industries popping up alongside the oil. For example, Seattle-based Summit Power Group LLC is building a $2.5 billion clean-coal facility near Odessa. W.P. Careys Midland-Odessa properties, which operate under the CubeSmart brand, are experiencing average occupancy rates of more than 90 percent.

Barriers to Entry

While the growth opportunities are attractive and potentially lucrative, getting a foothold in oil-rich markets is not easy. The biggest barrier to entry is finding capital, Elzi said.

Fearing the bust part of the boom-and-bust cycle, banks are wary of lending money in oil-boom regions. And then there are development challenges. In North Dakotas Dickinson-Minot-Williston area, land prices have spiked thanks to increased commercial development, and obtaining industrial zoning for land near residential areas can be difficult.

The remote areas of North Dakota can be a tough sell for some national investors. I dont think the national players will be going to a Williston, North Dakota, anytime soon, simply because the scale of operation up there for self-storage is better suited to the local and regional operators, Vestal said. However, North Dakota is seeing more out-of-state interest from regional investors. Argus recently brokered the sale of a property in Williston to an investment group from Aspen, Colo.

Yet another barrier to new construction in oil markets such as West Texas is a shortage of resources, such as construction workers and equipment. Self-storage tends to fall fairly low on the priority list for infrastructure projects in oil-boom areas. At the time W.P. Carey was considering its Midland-Odessa acquisition, seven hotel projects were under way in the region.

When some of the infrastructure has been built out and there are extra resources for self-storage, then there will be the demand to accommodate the extra supply, because it is an area of high growth, Taylor said.

Beth Mattson-Teig is a contributing author to a variety of national business and trade magazines, including National Real Estate Investor, "Shopping Centers Today, Franchise Times, Independent Banke, and Commercial Investment Real Estate among others. The Storage Facilitator is a self-storage blog  managed by SpareFoot  and hosted by partners SelfStorage.com .

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