Our roundtable of broker affiliates gathered to discuss storage in the Western United States. Panel members were asked to summarize the self-storage market in their areas: David Anderson, Lee & Associates, Carlsbad, Calif.; Richard Arnold, Arnold/Forcum & Associates, Portland, Ore.; Clifford Crowe, Lee & Associates, Carlsbad, Calif.; Larry Hayes, Hayes & Associates, Missoula, Mont.; David R. Laney of Realstar Commercial Real Estate, Sandia Park, N.M.; Joan Lucas, Joan Lucas Real Estate Services, Denver; and Jim Ramsay, Coldwell Banker Commercial, Redding, Calif.
Anderson and Crowe: Interest in investing in self-storage facilities remains strong compared to other real estate in Southern California. Top values were achieved by sellers who contracted in fall 2005 and closed in the first quarter of 2006. Several areas in the Inland Empire are fast becoming overbuilt with entitled land for additional development, and buyers are more cautious and conservative. Instead of relying on projected income, buyers want to be firmly satisfied by what the facility is currently grossing.
Cap rates have increased .75 percent to 1.5 percent over the last two quarters in the Inland Empire to as much as 8 percent or more. However on the coast (San Diego, Orange, Los Angeles, Ventura and Santa Barbara counties), values seem to be holding due to lack of sellers and entitled land for development, and can still command a 6.75 percent to 7 percent cap rate to the seller. More California buyers are looking outside the area for investments with greater yields. In general, storage facilities are generating 1 percent greater yield than office, retail and industrial, and 2 percent better than apartments.
Arnold: A current and continuing trend in the Oregon market is a shortage of sellers willing to sell properties at prices that will afford a reasonable return to a buyer. Often a seller wants to sell the future NOI of the property at an unreasonably low cap rate when the property is only 20 percent occupied. Ive also seen situations where a property thats been 60 percent occupied for five years is asking a selling price that could only be justified if the project were full. Realistic sellers should be willing to look at properties in relation to the market as a whole, not just their own income and potential.
Buyers are less interested in the metro Portland area than in outlying areas of Oregon. These buyers range from those looking for something to operate and replace or supplement their present incomes, to those seeking a sound investment.
Realistically, the quality of self-storage properties range from C to A grade, with most shopping properties with expansion capabilities. Buyer interest slowed around April, but recently it has accelerated and its more difficult to satisfy buyer demand.
Cap rates are running in the 6.5 percent to 7 percent range, while interest rates for self-storage run anywhere from 6 percent to 8 percent.
Lucas: Like so many other states, Colorado has experienced growth and contraction pains for the last 20 years. Today, the real estate market is booming in Colorado. In 2005, for the first time, investors paid more than $3 billion for office buildings, retail and industrial properties in the Denver area.
Colorado has an inventory of approximately 800 self-storage facilities ranging from 10 units to upwards of 750. The majority of large properties are located along the Front Range Corridor, an area bounded by Pueblo on the south to Fort Collins on the northapproximately 150 miles. Additionally, 775,000 square feet of self-storage is either on the drawing boards or under construction in this area. A few of the proposed projects are simple expansions of current facilities, but most are new, planned by developers just entering the market.
Today, we have more buyers than sellers in Colorado. The demand is due to favorable interest rates resulting from the 10-year Treasury declining almost 50 percent over the last 10 years. Savvy investors focused on commercial real estate and particularly self-storage properties as their investment choice. Cap rates are at an all-time low and are a function of low interest rates. However, the trend is upward; as interest rates start to move back up, cap rates will follow.
Multi-property self-storage portfolios in Colorado have been priced at 6 to 6.5 percent caps. On individual, newer, well-positioned properties, were seeing cap rates from 7.5 percent to 8.5 percent. Theres an oversupply of capital for the Denver marketplace. Lenders are fighting hard for good deals. Lenders and investors remain optimistic about the overall economy in Colorado, said Kevin Chadwick, vice president of Terrix Financial, a Denver full-service mortgage banking firm, The market here will continue to thrive, but projects will take longer to break even, and occupancies at run-down facilities will dwindle. Colorado will continue to be a great place to own self-storage, but developers need to remain cautious about oversupply.
Hayes: Much of whats happening in Montana has to do with population shifts within the state. Since 2000, more than half the states counties have shrunk in population, due to people moving from small, agricultural communities to areas with more services. Seven of the nine counties with populations over 25,000 had positive growththree in excess of 10 percent.
The trend for self-storage in growing markets has been strong with new units added as needed. In smaller, stagnating areas, theres little or no growth; new units are added only as older facilities exceed their useful life.
Laney: The New Mexico self storage market is a tale of two marketsone city and the other rural. In the last two years, the states largest citiesAlbuquerque (MSA pop. 800,00), Las Cruces (MSA pop. 250,000) and Santa Fe (MSA pop. 225,000)have experienced double-digit growth in population as Californians cash in their homes equity and flee to the clean air and open sunny skies of New Mexico. Recent changes in state tax codes have promoted a more pro-business environment, which in turn has helped local businesses grow and assisted with recruitment of out-of-state ventures.
Unemployment rates in the larger cities range from 3 percent to 4.5 percent, and are historically the lowest rates seen. Anticipated cap rates for larger city markets vary from 7.5 percent to 9 percent, based on property attributes. Barriers to market entry are greater in metropolitan areas because the development process can be stringent and lengthy.
Anticipated construction schedules stretch from nine to 18 months, depending on the municipality. Site selection and market analysis are critical. Occupancy numbers are hard to come by but generally are between 85 percent to 95 percent in the larger markets. Some facilities have waiting lists for certain units.
Sizeable markets to watch are Las Cruces in the south and Rio Rancho, an Albuquerque suburb. With abundant sunshine and a burgeoning population of 250,000, Las Cruces continues to grow at a record pace as the area attracts Southern Californians, Phoenicians and Tucsonans looking for a smaller community. Rancho is a fast-growing bedroom community (MSA population 125,000), aspiring to compete with Albuquerque as a twin city.
Smaller city markets experiencing similar growth, albeit at a slower pace, are looking at cap rates between 8.5 percent to 10.5 percent. Developers face fewer barriers; inexpensive land is abundant and construction oversight can be less stringent. This may change as municipalities are seeing green in development fees, and with attempts to promote smart growth.
Typical construction timelines in secondary markets range from six to nine months. Occupancy rates for smaller city markets vary, but typically range from 75 percent to 90 percent. Areas to watch are Alamogordo, Deming, Roswell and Farmington. All have become centers of commerce within their geographic region via rail or interstate highways. Roswell, Deming and Farmington have experienced recent growth in mining and oil. Alamogordo has an influx of retirees and military/government expansion due to Holloman AFB, White Sands Missile Base, and the creation of the New Mexico Spaceport, with scheduled launches for March 2007.
Overall, New Mexicowith continued growth in population and housing to support the existing and planned supply of facilitiesis an excellent place to invest in a self-storage project.
Ramsay: Northern and central California markets seem to be leveling out somewhat. Sellers are wishing theyd sold their properties two years ago because interest rates and cap rates have continued to rise over the past several months, thereby reducing the net operating income (NOI) and market value of the property. Sellers are still faced with the dilemma of what to do with sales proceeds. While they like the higher prices received in the past, when wearing the buyers hat, theyre not willing to pay higher prices commanded by todays sellers.
With the strong housing growth seen over the past five years, demand for self-storage continues to be strong with most Class A and B properties reporting 90 percent-plus occupancy. The housing market in northern and central California is off as much as 60 percent in some areas, with at least 25 percent being the norm. Home builders are offering smaller lots, more two story homes with less storage space. Theyre also using significant sales incentives such as swimming pools, cars, interest rate buy-downs, full appliances, window coverings and escrow closing costs.
The smaller lots and homes with less storage should create more demand for self-storage. Many self-storage owners are looking for land in these growth areas. Getting entitlements in smaller northern and central California communities can be somewhat easier and faster than in metro areas. Although the market is going through a market-value correction, mostly downward, the future remains positive in this area.
Michael L. McCune has been actively involved in commercial 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 1994, he created the Argus Self Storage Real Estate Network, now the nations largest network of independent commercial real estate brokers dedicated to buying and selling self-storage facilities. For more information, call 800.55.STORE; visit www.selfstorage.com.