Our roundtable of experts this month discusses the self-storage market in the Southeastern United States.
William Barnhill, Representing the Florida Panhandle
Omega Properties Inc., Mobile, Ala.
Occupancy levels in northwest Florida have benefited from additional demand over the last two years because of hurricane Ivan, but the majority of this demand has subsided. Some of the coastal areas are subject to overbuilding. Additionally, insurance rates have become extremely high and some wind-policy premiums have exceeded $100,000.
Although 2006 was a calm storm year, it may take at least another quiet storm season for insurance rates to moderate. Most insurance brokers weve spoken with feel premiums have leveled. however, the uncertainty regarding insurance premiums, coupled with the issue of overbuilding, has caused some buyers to become more cautious in purchasing facilities.
Overall, the general economy in Floridas panhandle is still growing, although condominium sales have slowed dramatically with prices dropping significantly. Cap rates have been trending upward about .5 percent to 1 percent for the last several months. Some sellers are still holding out for higher prices reflecting 8 percent cap rates, while most buyers are anticipating rising interest rates and looking for better deals.
Dale Eisenman, Representing North Carolina, South Carolina and Georgia
Midcoast Properties Inc., Hilton Head Island, S.C.
Generally, self-storage in the Carolinas and Georgia continues to perform well. As anywhere, local market conditions affect occupancy and rental rates.
Most operators report stable rents and occupancy, although some described poorer collections than normal during the winter. Real estate taxes continue to increase and present a challenge. Additionally, some coastal areas have experienced a significant increase in insurance premiums and a lack of insurance availability in hurricane-prone areas. hopefully, this will change to reflect this years quiet storm season.
Development continues at a steady pace, particularly in the major metropolitan areas. Zoning for self-storage has become more difficult and time-consuming without certainty of success. Acquisitions of well-managed, ample-sized existing facilities are an attractive alternative to development because costs are known and there are no construction delays to block positive cash flow.
A potential threat to occupancies and rental rates near military bases is an effort by the post-exchange services to construct their own self-storage facilities right on bases. The North Carolina Self Storage Association and Self Storage Association are aggressively making the case that military personnel are well served by existing privately owned, property tax-paying, local self-storage businesses. Using taxpayer money to create a subsidized on-base competitor to businesses currently serving and supporting the communities is unfair, unwise and bad public policy.
Metropolitan Atlanta (particularly the northeast quadrant) continues to thrive, as well as Raleigh and Charlotte markets. All are attracting developers in addition to buyers of existing facilities. Overbuilding could become a short-lived problem in these markets, but even some excess capacity should be absorbed in time, given the areas growth. The Triad of North Carolina as well as Columbia, S.C., appear to have stable occupancy and rental rates, while Myrtle Beach, Wilmington, Charleston and other coastal cities are seeing increases in both.
Overall, the Southeast is fortunate to have continued growth and prosperity, boding well for self-storage in the short and long term.
Grady Riggs, Representing Washington, D.C., Maryland and Virginia
Long & Foster Real Estate, Fairfax, Va.
At least two or three new buyers inquire every week for self-storage properties in the Washington, D.C., Maryland and Virginia region. Many owners have been bombarded with calls asking if theyre considering selling. Since self-storage tends to be the ideal business for retirees, land owners and investors looking for low-intensity management, its reasonable to assume a low turnover especially where entry barriers are high.
Properties currently on the market have been scrutinized pretty well and all tend to have issues, primarily unrealistic asking prices based upon future net operating income and often without the potential to expand.
Washington, D.C., is undersupplied with the lowest supply index in the nation. Vacant land for self-storage is non-existent and conversion possibilities are limited. Opportunities exist for investors willing to undertake multistory infill or conversion projectsif they can find them. even in nearby suburban counties in Maryland and Virginia, its extremely difficult to find affordable land with the proper zoning.
The explosive housing market over the past several years is now slowing down. Scores of investors and speculators have abandoned the residential property market and are looking to other asset classes to invest. Many new Class A self-storage properties have opened their doors in the past few years including attractive multilevel in-fills.
With the large number of homeowners associations in this region restricting certain vehicle types and sizes, storage facilities that can accommodate oversized vehicles and boats are doing very well. Anywhere affordable properly zoned land in the Washington MSA can be foundwith reasonable visibility and accessibilityshould be a good site for self-storage.
Many investors are moving into the Richmond MSA due to the attractive demographics and relative low cost of doing business. The area is considered undersupplied at 3.63 rentable square feet per person against a demand of 5.01 square feet. Clearly opportunities exist.
Norfolk MSA is the largest consumer market between Washington, D.C., and Atlanta. With a diverse and growing economy, its an attractive place to visit, live and do business. The self-storage market in the hampton Roads area is considered to be in equilibrium with 4.98 rentable square feet per person (compared to 5.54 in the nation). However, with good market research one can still find great sites for new facilities in this region.
In summary, the Mid-Atlantic region is very strong. Low inventory, high entry barriers, low interest rates and investor demand makes for a sellers market, but they must be realistic about their asking prices. Buyers should expect low cap rates between 6.5 and 7.5 percent in urban areas and 7.5 and 9 percent in suburbia. Rural markets in Maryland and Virginia tend to mimic rural markets elsewhere in the United States, with cap rates in the 9 percent to 11 percent range.
W. Frost Weaver, Representing North and Central Florida
Weaver Realty Group, Jacksonville, Fla.
Competition is strong in the urban areas of north and central Florida, causing rental rates to remain fairly flat, with little net absorption. New facilities were built as a result of the housing boom, but rapid declines in new sales activity directly impacted occupancies of existing sites. Facilities built in paths of new development will experience longer absorption periods.
From an investment perspective, theres still strong interest from buyers for existing facilities, with much more interest from potential buyers than sellers willing to sell. For a number of reasons, we also see a widening gap for owners willing to sell and what buyers are willing to pay. For example, the cap rate for actual purchases is closer to 8 percent, while the asking rates are still around 7 percent.
Other main factors reflect post-sale operating expenses. Most Florida counties re-assess for real estate tax purposes based on a percentage of sale price. Another more recent issue involves property insurance. For existing insurance policies, the premiums have remained fairly stable, but new premiums are increasing dramaticallyif insurance is available at all (especially windstorm). The resulting decrease in net income and property value has caused a number of potential sellers to withdraw properties.
The Florida State Legislature is well aware property insurance is a major problem, residentially and commercially. The legislature is analyzing options to ameliorate the problem, otherwise there could be long-term implications throughout the state.
Michael L. McCune is president of the Argus Self Storage Sales Network, a self-storage real estate brokerage and development company based in Denver. Argus also operates www.selfstorage.com a marketing medium for owners in the self-storage industry. For more information, call 800.55. STORE; visit www.selfstorage.com.
