Publication XI

By Michael McCune
Argus Self Storage Sales Network

The good news is that despite all the building that is going on across the country, over all rental rates have not dropped in any significant way. In fact the average rental rate for the three most common sizes, 5x10,10x10 and 10x20, increased by 3.0%, which for the first time since 1993 was higher than the increase in inflation of 1.4% (EXHIBIT A). In addition, the average rate for these three units is the highest that it has ever been. On the other hand, the number of units being filled up is on the decline. Occupancy rates nationally were down by 2.6% and while this decline in of itself is not significant, the fact that occupancies have dropped 7.8% over the last five years is alarming (EXHIBIT B).

Rental Rates

The numbers for rental rates have many puzzles hidden in the details and while the average rental rate went up 3.0%, a closer look by unit size gives a little more complex view. For instance, the rental rate for a 10x20 unit increased about 3.3% last year, however, that one year increase was greater than the overall increase in rental rates for the last six years! Other examples of the mystery are that rental rates for a 5x10 unit had no real increase and are still below there highest point of 1995. The bell weather 10x10 unit was up about 4.5%, but on average has had an annual increase of just 1.4% over the previous seven years.

The rental rates for 1998 are certainly an improvement over the previous years, but compared to the rental rate increases in other forms of real estate they seem quite modest. In office, retail, apartments, land and lodging the rates and price increases have been nothing short of spectacular over the last five years. Why rental rate increases are not more comparable to other forms of investment real estate is some what unclear, but it may have something to do with the level of overall, long term demand for self storage.

Occupancy Rates

As usual the averages don't show everything. As the regional data shows the gains and losses are something of a mixed bag. The Southeast, North Central and West regions all show declines of 4.1%, 1.3% and 5.3% respectively, while both the Northeast and South Central, show an increase of 1.3%. Given the fact that there has been some significant building going on in the industry, these results are not necessarily surprising.

It is important to note that the self storage industry has not shared in the general boom in demand that has impacted the rest of the real estate business over the last four years. The trend in self storage occupancies has certainly not been consistent with either the rest of the real estate industry or the general economy over the last four years. Obviously, the next question is what happens if the economy begins to slow down? While there are some that will tell us that the industry actually prospers in a recession, I can't help but believe that on balance such a decline would leave our industry affected in some way.

What does this data tell you about your investment in self storage? Clearly there is a developing uncertainty evidenced by the divergence in these two trends. As this uncertainty unfolds and becomes more exaggerated, we believe that it is likely that buyers will be advantaged to the sellers over the intermediate to near term. It is not a time to despair, but to be cautious and alert. However, if you know that you are going to be selling in the next year or two (i.e. retirement?) now might be a good time to get the process started just to avoid the uncertainty of the few of years.