M&M: Bank lending to boost new self-storage sales

By Marcus & Millichap

While the national economy continues to gain steam, uneven employment growth by market will lead to a choppy recovery in self-storage operations in 2011.

Nationally, 2 million positions will be added this year, providing the opportunity for job-seeking residents to migrate to healthy employment hubs. Several coastal markets will account for an out-sized share of payroll expansion, including New York City, Washington, D.C., and Seattle-Tacoma. As more individuals migrate to these areas in the first half of 2011 and downsize residences, indicators of a stronger recovery in self-storage property operations will emerge.

Seattle-Tacoma, for instance, will boast the highest average occupancy rate in the nation at the end of the year. Sun Belt states are also adding jobs at an accelerated pace, but improvements in self-storage operations will remain bifurcated. Markets without a significant overhang in housing or recently built self-storage properties, including the major Texas cities, will register healthy occupancy gains.

Many formerly overheated housing markets, however, are challenged with a supply glut, as self-storage builders chased empty houses into the suburbs. Arizona, Nevada, Florida and the High Desert region of California are the areas most at risk of a prolonged downturn.

Self-storage investment activity will increase this year as banks sell off REO properties, drawing regional syndicates from the sidelines to target Class B/C assets throughout the Sun Belt. California and Florida will register a sizable share of closings as maturing loans and soft operations push properties into foreclosure, especially with banks still hesitant to refinance devalued assets.

Financing for new buyers seeking properties below $5 million and with a stable operating history will emerge in the form of SBA loans, helping to accelerate activity. At the top of the market, cash-heavy REITs and institutions are moving back into the self-storage arena, leveraging operating efficiencies to add value to recently purchased properties.

Class A assets in primary markets, including those in the Northeast, will garner the most attention. Such properties generally will trade for more than $10 million and at initial yields in the mid-7% to low-8% range, depending on location and age.

Outlook by region

East: Continued job growth and above-average median household income levels will help push up occupancy levels in the East by 100 basis points in 2011 to 83.8%. As a result, operators will increase rental rates 3.2% to $1.03 psf.

Midwest: Improving economic conditions in the Midwest will generate a 60 basis point rise in the region-wide occupancy rate this year to 83%. Asking rents will tick up 1% to $0.78 psf.

South: After hitting a five-year low in 2010, occupancy rates in the South will improve 30 basis points in 2011 to 79.8%, fueled by projections for healthy household formation and expanding payrolls. Gains will be insufficient to push up rental rates significantly, however, with a modest 0.8% rise to $0.80 psf anticipated.

West: Strong population growth and a gradual turnaround in the housing market will drive occupancy levels in the West 80 basis points higher in 2011 to 82.7%. As leasing activity picks up, owners will raise asking rents 1.6% to $1.12 psf.

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