Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/700533
July | August | 2016 CCIM.com death, marriage, divorce, building a home, renovating a home, or downsizing a home. "e self-storage market is constructed like a pyramid with mom-and-pop owners of one to five properties at the bottom half and the top 12 percent is owned by REITs," says William Brownfield, CCIM, CRE, of Brownfield & Associates, LLC, in Houston. "In the middle, regional players are building new properties and buying the best mom- and-pop properties. ey fix up the proper- ties, standardize them, and may eventually sell them to REITs." As storage has evolved, many of the facili- ties have changed from bare-bones, concrete- and-corrugated-aluminum shells into more attractive, climate-controlled facilities with LED lighting, which blend into good neigh- borhoods and offer tenant insurance. Thriving Marketplace Once specializing in the office marketplace, Larry Goldman, CCIM, entered self-storage 18 years ago and has never looked back. "I prefer ugly properties with pretty financial statements versus pretty properties with ugly financial statements," says Goldman, self-storage investment properties specialist with the Argus Self Storage Sales Network and president of the Kansas Self Storage Owners Association in Overland Park, Kan. During the past five years, per capita, the need for self-storage has grown from 7 feet to 8.4 feet. e five-year average total return on publicly traded storage REITs was 24.4 percent compared to 20.6 percent for multi- family and 12.7 percent for office, according to Goldman. He covers a broad swath of the Midwest self-storage market, which includes Arkan- sas, Missouri, Kansas, and Illinois. Currently, Goldman calls it a sellers' market, which has seen strong rate growth, occupancy growth, and fewer concessions for buyers during the past few years. However, he believes by 2018 that capitalization rates will be higher, and the cost of capital will increase as interest rates rise. "e question is how much longer will the feeding frenzy continue as today's develop- ers may be late to the cycle," Goldman says. "Similar to other commercial real estate property types, self-storage is a cyclical business, and I have seen the herd mentality lead to overbuilding." In Alabama and nationwide, Barnhill expects self-storage to be strong for another 1.5 to 3 years. Like all commercial real estate sectors, self-storage is cyclical. "e real risk in self-storage investments comes from higher interest rates and overbuilding," he says. Recognizing that the self-storage mar- ket was peaking in 2005, Barnhill locked in 10-year financing through commercial mortgage backed securities loans and is now refinancing for the next 10 years at even lower interest rates. He also is upgrading the quality of his self-storage facilities and con- stantly refines his marketing tactics. "We do internet marketing, including search engine optimization, buying key- words, and formatting for mobile phones, as well as using algorithms to manage our properties," Barnhill says. "Now we have to aggressively market because there is so much competition and demand is high." Self-storage users roughly divide between 20 percent for businesses and 80 percent for individuals, according to Brownfield. e need spans the socio-economic spec- trum through good and bad economic cycles, and the industry is oen described as recession-resistant. While Mike Patterson, CCIM, entered self-storage just four years ago, he says the market "makes sense and uses tools from CCIM courses." Based in Carrollton, Ga., Patterson describes self-storage as recession resistant. "If you manage cash investments in self- storage well, it's hard to get in trouble," says Patterson, commercial broker at Commer- cial Realty Services of West Georgia. "Cash f low gets better, and the rents go up. It's almost impossible to fail unless you borrow yourself into problems." Collaborating for Success Many of the CCIM designees involved in the self-storage industry have joined Argus, a nationwide brokerage network for self- storage facilities headquartered in Aurora, Colo. About 40 brokers across the country share information and cover different mar- kets under the Argus umbrella. These Argus broker affiliates reported $250 million in sales for 2015 and currently have $155 million of self-storage properties listed in 26 states and more than 65 individ- ual markets. Of the more than $450 million in recent sales transactions, facilities ranged in price from $300,000 to $80 million. Shortly after Barnhill entered the self- storage market, he joined Argus, which has helped him to develop a national perspec- tive of the industry. "Belonging to Argus has helped me to gain recognition nationally and to build relationships with REITs and other big players in the industry," he says. "Within our Argus network, we call each other and ask for advice on transactions and with cli- ents, which provides for a lot of synergy." Becoming part of self-storage and Argus can happen organically for CCIMs who were in other sectors of commercial real estate. Patterson entered self-storage through a client who owned storage units along with many other properties. His client introduced Patterson to individuals at Argus in 2012, and he became involved as a result. Brown- field was initially introduced to the indus- try in 2008 by an office building partner who had some self-storage units. At about the same time, the founder of Argus, Mike McCune, approached him about becoming an Argus affiliate. "Self-storage has an entrepreneurial cul- ture, which is a lot more fun than office, as I am generally dealing directly with the deal makers," Goldman says. He also attributes his affinity to the self- storage industry in part to his development of analytical skills through CCIM training and CCIM resources such as STDB. Unlike other sectors of commercial real estate, self-storage facilities are low mainte- nance and less costly to build. With demand increasing steadily and new inventory still lagging, the marketplace provides good investments from small individual inves- tors to large investors such as pension funds and REITs. While self-storage experts antici- pate at least 18 months of strong growth, the down cycle will be soer than other industry sectors. People need extra storage in good times and bad. Sara S. Patterson is executive editor of Com- mercial Investment Real Estate.