I recently assembled a roundtable of real estate experts to discuss the state of self-storage in the south-central region. Ive asked them to comment on the state of the market in their areas and share their thoughts on how the industry will perform in the future. Joining us in the discussion are:
- Bill Barnhill, Stuart LaGroue and Shannon Barnes, Omega Properties Inc., Mobile, Ala.
- Mack Browder, Crye-Leike Commercial, Memphis, Tenn.
- Bill Brownfield, MKP Self-Storage, Houston
- Jon Cerruti, Jack Stumpf & Associates, Harvey, La.
- Larry Goldman and Holly Mills, RE/MAX Best Associates, Overland Park, Kan.
- Jared Jones, Bauer & Associates, Tulsa, Okla.
- Richard D. Minker and Tyler Trahant, MinkerTrahant & Associates, Forth Worth, Texas
How have self-storage occupancies and leasing activity held up in the major metropolitan statistical areas (MSA) over the last year?
Barnhill: In Alabama and Mississippi, unit occupancies have suffered only slightly, but due to prevalent price discounting, the impact on income has been more detrimental. Overall, the slow economy has had a negative impact on the self-storage business in our major MSAs.
Browder: The major MSAs in Tennessee are Memphis, Nashville, Chattanooga and Knoxville. In speaking with self-storage operators in these areas, it appears occupancies are down slightly in 2010, along with leasing activity. Most are optimistic about a slight pick up in occupancies and leasing activity in the coming months, depending on the improving jobs outlook.
Brownfield: In each of the major markets in south and central TexasHouston, Austin and San Antonioalmost all the owners we spoke with said vacancies grew by 4 percent to 6 percent in 2009, then markets were flat in the first quarter of 2010. Positive absorption has kicked in every month since March. Theres positive job growth, but its still tough going. Overall, we think occupancies and rates will hold up through the remainder of the year.
Cerruti: In Louisiana, occupancies have dropped the last two years to average between 75 percent and 80 percent. This year has been relatively stable, with little or no reports of increases or decreases in occupancy.
Goldman: For the most part, central Arkansas has continued to perform well over the past couple of years and should remain stable for the foreseeable future. Northwest Arkansas is slowly starting to recover from the overbuilding from a few years ago. There are a few sub-markets that have benefited from the recession, as downsizing has actually stimulated demand for storage in those areas.
Jones: Throughout Oklahoma, occupancy levels have remained flat. I anticipate theyll drop during the coming fall and winter months because of seasonality, but they should rebound as usual in the spring.
Minker: Weve found the north Texas market holding its own relative to what weve read about the national market. What has been somewhat universal is existing stabilized facilities with 70 percent to 80 percent occupancy have seen a portion of their facilities losing 5 percent to 10 percent in occupancy, others are holding steady and a limited number have increased occupancy.
As we are seeing investors re-enter the acquisitions market, should potential sellers hold for a while longer or is now a good time to sell?
Browder: Most buyers are interested in larger facilities with some climate-controlled units. Financing continues to be an issue with all real estate, so qualified buyers are still relatively scarce. Deciding when to sell is a function of the owners needs. If the owner is optimistic about continuing improvement in the economy and in the operation of his facility, I recommend holding off on a sale for another 12 to 18 months.
Brownfield: Owners who dont have a pressing need to sell should probably hold on and wait for their market to continue recovering. The Texas population is growing, which bodes well for storage long term even if job growth is currently anemic. Capital markets are loosening up a little, so there should be more lending on the horizon. That should mean stable to slightly higher values, since there will also be more bidders as availability of debt increases. Owners approaching retirement and worried about the effects of higher capital-gains tax should consider selling.
Cerruti: Were still seeing a lack of buyers in Louisiana because of stringent lending practices. Aggressive local banks are usually the best choice when looking to secure financing for a self-storage purchase. With the uncertainty in the economy there are fewer risk-takers in the market, so I recommend owners hold off on selling now unless they must.
Goldman: Between concern for an increase in capital-gains taxes in 2011 and the belief interest rates will be increasing in the next few years, potential sellers are more interested than ever in selling their facilities. Generally, the fundamentals of storage investment are more compelling than other property types and other investment vehicles, so buyers are still active throughout Arkansas.
Jones: Sellers who have attractive assumable financing in place are realistic about value, and those who have a stabilized performing property will find a receptive market for their property, as there is money on the sidelines waiting to be invested for the right opportunity. If inflation occurs, holding would not be a bad strategy, as prices will increase.
LaGroue: Nows a good time for potential sellers to consider listing and selling their properties, especially if the property is stabilized and has been for at least the previous 12 months. New facilities currently in rent-up tend to be more challenging to sell because its hard to finance those properties, and potential buyers would be assuming the risk during the continued rent-up phase. Another important reason to consider selling now is the implications that will arise in 2011 when capital-gains tax rates will most certainly increase.
Minker: If an individual has a reason to sell his self-storage property, nows as good a time as any. With a potential change in the capital-gains tax rate and other estate-planning activity, this is the time to be looking at ones plans to take a facility to market. The day of the tire kickers is over. The investors were dealing with have funds available and can get facilities financed if they make economic sense. We do see potentially more facilities going back to lenders, which may be competing for the current investors dollar.
What is the current state of the local economy and how to you think it has affected self-storage?
Barnes: The economies of the coastal areas of Alabama, Mississippi and Florida have been adversely affected by the Gulf Coast oil crisis. Banks are worrying that some customers may not be able to repay loans due to the repercussion of the oil crisis. The unemployment rate is still about 10 percent, so many people have lost their homes. Some of those who rent storage have been slow to pay, making collections more difficult and delinquencies rise. From an investment perspective, the economy has made it difficult to obtain financing, especially for a property thats struggling to rent up.
Browder: The economy in Memphis is flat with slight uptick in optimism for near-term economic improvement. Chattanooga is upbeat because of a new Volkswagen automotive plant beginning operation. Nashville has been side-tracked by the early summer flooding but will recover and return to solid growth within 6 to 12 months. Knoxville is flat to slightly positive. In all these markets buyers have been less aggressive, choosing to wait for more solid signs of stabilization in the housing market and improving job outlook.
Brownfield: Houston, Austin, San Antonio and Corpus Christi are all ranked by MoodysEconomy.com as recovering markets, meaning they measure positive in four areasemployment, housing starts, home prices and industrial production. National buyers like Texas a lot right now, especially the major markets. They know our states economy and long-term population trends are favorable for the storage business. Todays buyers wont pay for vacancy, so that puts real pressure on sellers to improve their marketing, to spend smarter on marketing tools, and to look for ways to increase occupancy and rates while also controlling expenses.
Cerruti: The Louisiana economy is hurting, but the effects are somewhat mitigated because of money still coming in from Hurricane Katrina. The Gulf Coast oil spill will have a short-term negative impact on this area, but the new mayor of New Orleans brings hope of a turnaround.
Goldman: Generally speaking, the economy in Arkansas is weathering the storm better than most of the country, although northwest Arkansas is slowly recovering from an overzealous building boom from a few years ago. Even in that area, were seeing reasonable growth in occupancy, which should continue as theres practically no financing for new storage development.
Minker: The north Texas area remains one of the stronger areas in the United States, but it has felt the impact of the economic downturn. The Texas unemployment rate dropped to 8.2 percent in June, down from 8.3 percent in May, and continues to trend well below the U.S. unemployment rate of 9.5 percent. While the United States continues to have negative job growth over the past year, the Dallas/Fort Worth area has had more than 25 percent of the job growth for the entire state of Texas, which bodes well for the local economy as a whole.
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].
