November 1999

By Michael McCune
Argus Self Storage Sales Network

Cinelli: From my experience, the New Jersey market has never been better. Most areas are experiencing the same market conditions - higher rates and low vacancies. Rental rates have definitely gone up due to low vacancies.

Magilton: 68% of the facilities that I track charge between $75-$120 for a 10x10 while 15% have rates above $120. While prices are set locally and vary from town to town there appears to be no difference in occupancy rates no matter what the area price is. I think occupancy may be getting ready to stabilize at this point because of the new construction going on.

Gilliland: Yes, in occupancies. In my area specifically, I know of several projects where occupancies are stalled at 55-60% due to too many properties coming on line at the same time. The market is there, but it will take a couple of years to lease up.

Are investors still interested in self-storage and if so what kind of investor are they?

Mendola: In New Hampshire buyers are becoming more cautious and there seems to be a number of new players in the market. In Massachusetts the appetite is still strong to own and develop.

Gilliland: Experienced buyers are looking for the cream of the crop in the first tier cities only. Local first time investors are the buyers that are really active. Everybody is talking about the mini-storage business and they want in.

Cinelli: Investors as a whole are very serious in pursuing investment opportunities. Most people are experienced with the self-storage industry, but vary in the amount of units they own. We see new developers expanding into self-storage business.

Are the local banks continuing to make loans in your area? Are the rising rates having any impact on the buyers?

Boulos: For quality projects, the banks in the Greater Portland area compete heavily with each other to be selected as the funding source. What is different these days as opposed to ten years ago is that the banks have done a good job adhering to their lending criteria. Without a viable plan and substantial equity on the part of the buyer, projects will not be financed. This has helped to keep the demand/supply equation in check.

Magilton: Interest rates will eventually affect the owner/investors rate of return and will push down the sales price to maintain returns, but not until there is an inventory of facilities on the market to choose from.

Gilliland: Rising interest rates have had an impact on prices, but not the desire to purchase a property.

Mendola: Banks are continuing to make loans in New Hampshire. However they are more cautious and are looking at the fundamentals of the deals more closely. In Massachusetts buyers want to own and banks are continuing to lend on well-conceived projects.

Are you seeing any signs of overbuilding? Is it really a big deal in the Northeast?

Magilton: I see a lot of new construction going on, but I will not classify it as overbuilding at this point. Years ago a small number of self-storage facilities met the needs of the area. As the years have passed, new storage facilities continue to be built and existing ones are being expanded. Yet, the occupancy rates continue to climb in this area. I feel this is because a larger segment of the population has become aware of self-storage and is now using it.

Mendola: In southern New Hampshire many developers have answered the call of 97% occupancy rate and rising rents. In the last 17 months, nine projects have either opened or are being built as of October. These projects represent some 400,000 SF of new space being added to the market. This phenomenon has increased vacancy and lowered average rents per SF. In Massachusetts many players including the nationals are aggressively developing projects in various markets. The population in the Boston area is so much larger than in New Hampshire that the building does not seem to have such a downward pressure on rents and occupancies.

Boulos: We have not seen any signs of overbuilding. While a few projects have been approved and are ready to build, we have not seen this translate into a significant amount of new construction. I suspect the reason the supply of product has been kept in line is due to the banks unwillingness to finance projects without a substantial amount of equity from the developer. In addition, in our area, it is difficult to justify new construction, as average rental rates do not support new development projects.

Tell me about possible conversions of other uses to self-storage. Some people are concerned that this could add too much space?

Mendola: In the northeast there are a significant number of mills and abandon warehouses left over from the industrial revolution. Conversions are becoming very popular, particularly in the areas where the prices of land are escalating. The functional obsolescence of the building presents significant cost savings to a self-storage developer.

Boulos: In our market, we have seen functionally obsolete buildings get a new lease on life with their conversion to self-storage. Often times, this is more of a threat to existing facilities, as many of the obsolete buildings can be purchased relatively inexpensively. Many owners of existing buildings who have been unable to secure tenants for traditional uses look to self-storage as a solution. Many perceive it to be a quick and easy fix, which it sometimes can be, but often times is not. We have seen this development approach to be less of a threat in recent years, as the economy's health has taken many of these buildings off the market with their conversion to traditional commercial uses.

Cinelli: In my market we are seeing the most popular conversions in industrial buildings. There are some retail centers that could be turned into storage. The developers will have to be very much in tune with what the towns have on the agenda as far as existing approvals.