This month's travels take us to the Northwest. The group we interviewed seems to be seeing a decrease in the effects of the recession, confirming the self-storage industry has once again eluded the fate that befalls other types of real estate. Let's hear what the local experts have to say about their respective cities and regions. Our Northwest brokers are: Richard Arnold, Arnold Forcum & Associates, Portland, Ore.; Kent Curtis, Thanksgiving Property Group, Provo, Utah; Larry Hayes, Hayes & Associates, Missoula, Mont.; and Marc Neumann, Wallace Properties, Bellevue, Wash. I will add some comments on the national market in contrast.
1. Have you seen the impact of a recession in your area?
Arnold: It is most noticeable in the region as overbuilding in high-tech office, flex and warehouse space. There has been some slowdown in demand for self-storage space, but no letup in demand by investors to purchase the product.
Curtis: Yes, vacancies in the A, B and C marketplaces have increased significantly. Rates have dropped as a result, and deals are harder to find. Other categories, however, such as land sales, have seen no impact. Occupancy in storage units has not been affected, nor have prices.
Hayes: Montana is one of seven states not officially in recession, according to a recent newspaper article. The real estate market here is still very good.
Neumann: The recession has had a definite impact in Washington. State unemployment has risen to approximately 5 percent. The failure of the dot-com companies and the slowdown in world trade has affected many of our major businesses: Boeing, Microsoft, Weyerhaeuser, etc. We have a glut of office space that is not leased (vacancy at approximately 20 percent). Real estate investors are more cautious. We have lots of tire-kickers, but fewer bona fide buyers. I see the local real estate investment market turning around midyear.
McCune: The latest on the national scene is that vacancies are up a little; but the good news is with other types of real estate in the tank, investors are really excited about self storage's consistent performance and good cash flow.
2. Are investors still interested in self-storage and, if so, what kind of investors are they?
Arnold: As I mentioned above, there seems to be no letup in demand for self-storage product, with significant pressure coming from those investors who have funds with accommodators and are trying to defer gain on a previously sold investment.
Curtis: No change has occurred in the type of investor looking at storage. In my experience, investors who prefer stocks still prefer them, and investors who prefer land still prefer land. One change has been in the small to medium apartment market, where deals are harder to find. This market has seen an increase in interest since the recession began, indicating a change in preference for investors.
Hayes: Yes, there are still investors here in Montana. They are mostly cherry-pickers looking for good returns.
Neumann: Investors I talk to are still very interested in self-storage, which is still perceived to be an excellent investment vehicle. I think more people have become interested in real estate since the stock market hit the skids.
McCune: Our Northwest group is finding it is part of America--that is, there are buyers but not many "greater fools."
3. Are the local banks continuing to make loans in your area? Are the falling rates having any impact on the buyers?
Arnold: My own experience tells me the banks are interested in accommodating their customers and like the idea of the rent flow-through each month.
Curtis: Banks are loaning with much more care than in the past. They are more tentative, and loan-to-value rates have decreased. I lost a deal recently because of an overcautious bank. Falling rates have impacted buyers, as a spread on loaned money increases.
Hayes: Banks here are still making loans, but not at screaming rates.
Neumann: Local lenders who like self-storage are continuing to make loans, but they are more stringent in their qualification of borrowers. Money is still available for self-storage at 70 percent loan-to-value and debt coverage of 1.20 percent. Rates are 8 percent to 8.5 percent, with 25-year amortization. Investors are cautious. Rates have some impact, but not as much as you would think.
McCune: The recession is making bankers do a better job of underwriting, but also making them appreciate the cash flow, as Arnold points out. This is a very good combination for the industry because when the underwriting gets "sloppy," overbuilding happens.
4. Are you seeing any signs of overbuilding? Is it a big deal in your respective area?
Arnold: I spoke with one of the larger developers and managers of self-storage in the region. I was told self-storage is overbuilt. Vancouver, in particular, is significantly overbuilt, and some small cities in Oregon are overbuilt.
Curtis: Overbuilding is a problem in the southern part of the valley. This has impacted rates and vacancies more than any other factor. New facilities outpace the population growth, lowering occupancy in the short run. In the long run, I see the problem eliminated, as cities disallow new developments.
Hayes: We have seen some overbuilding in Montana. It is getting to be a big deal here.
Neumann: There are many signs of overbuilding, especially on the west side of the state. Many owners of new projects are struggling to reach pro forma occupancy of 85 percent to 90 percent. This is especially true in areas around greater Seattle.
McCune: See question 3.
5. Are there many conversions (e.g., a warehouse to self-storage) in your area? If so, are people concerned this could add too much space?
Arnold: Conversions are not a factor in the Oregon/Washington/Vancouver area.
Curtis: There are no conversions that I know of here in Utah.
Hayes: There are very few conversions in Montana.
Neumann: We are not experiencing at lot of conversions of warehouse and office buildings to self-storage use. If office vacancy continues to stay at 20 percent for an extended time, this could change.
McCune: Conversions are a regional thing for the most part and highly dependent on high land prices.
6. Which, if any, REITs are active in purchasing self-storage properties in your area?
Arnold: I believe the REITs are still selectively active in the region, but as in other parts of the country, they are a modest factor.
Curtis: There are no REITs purchasing here in Utah of which I know.
Hayes: There are no REITs actively purchasing in Montana.
Neumann: REIT developers and investors are not active in our market at this time. I believe they consider this area overbuilt--land costs are too high or opportunities are better elsewhere.
McCune: The REITs continue to spend a lot of energy on development. The returns on storage work better for their overhead when they build new storage facilities rather than buying existing ones.
Michael L. McCune has been actively involved in commerical real estate throughout the United States for more than 20 years. Since 1984, he has been owner and president of Argus Real Estate Inc., a real estate consulting, brokerage and development company based in Denver. In January 1994, he created the Argus Self Storage Real Estate Network, now the nation's largest network of independent commercial real estate brokers dedicated to the buying and selling of self-storage facilities. For more information, call 800.55.STORE or visit www.selfstorage.com.
