The Carolinas:
The Magnolias Are In Bloom—Is Self-Storage?
BY DALE C. EISENMAN AND MICHAEL L. McCUNE
It’s easy for folks in other parts of the country to sometimes
overlook the Carolinas as an economic force. One might find it
surprising that these states together have the same population as
Illinois and half again the land area. It also might be of interest
to find out where the home office of your bank is located, as some
of the largest and most powerful of the national banks are located
in the Carolinas. The area is growing rapidly with high-tech
employers and a great lifestyle, drawing people from all over the
country. The area has one of the greatest concentrations of higher
learning facilities of any place in the country. In fact, in one
Raleigh salon, one of the patrons was overheard saying, “Harvard was
the Duke of the North.” All of the attributes of these two beautiful
states have caused self-storage to become abundant throughout the
area. But what is the state of the market in the Carolinas? A look
at the national market first may help give us a benchmark for
measuring how the market in the Carolinas varies from the rest of
America.
A Mixed Bag Of Economic Currents
The good news is first. Interest rates remain low, actually at a
40-year low, and the prognosticators seem certain that rates will
stay low for the near future. In fact, some are actually projecting
short-term rates to go even lower. However, the rates for
medium-term fixed rate loans (seven to 10 years) probably won’t go
down much from this point because lenders aren’t likely to risk that
rates will not go up for that long of a period. There are rumors
around of some very high quality projects getting a 6.75 percent
rate, although most of the quotes for rates appear to be north of
7.25 percent. Of course, this happy circumstance also has a downside
and that is the very real potential of overbuilding because there
are “cheap funds” available for building new projects. The
combination of low rates and money availability are just too much
for a good developer to pass up. Also, as we shall see later, the
relative balance of the supply and demand in the Carolina markets
may prove to be attractive to developers. However, one factor
mitigating the potential is that lenders are exercising more
restraint than in past economic cycles.
The national “non-recession” economy is also having an impact on the
self-storage industry across the country. Hence, there is certainly
a lot of anecdotal information indicating that occupancies and rates
are beginning to soften. The available information would indicate
that there is not a general problem, but rather a softness that
appears, at least for the time being, to be highly localized.
However, as we reported in the August Mini-Storage Messenger, the
situation is becoming more generalized in the Northeast. Many
operators have reported that the events of 9-11 were the turning
point for slowing of demand and that recovery has been slow. It has
been reported that one of the major national self-storage operators
continued to push rates up after 9-11and has now had to retreat to
lower rental rates. Discounting, sometimes the first harbinger of
lower rates, is becoming more evident in several markets.
The Carolinas’ Future Is In The “Balance”
The first thing that we should do in understanding the Carolinas’
market is to look at the sidebar provided by Chris Sonne of Self
Storage Economics, who has once again put his computer in gear and
cranked out the information we need. A quick review of Chris’s
numbers indicate that both states are roughly in a current “state”
of balance as to supply and demand. Of course, that is good news and
all would seem too well. However, these numbers may disguise some
not quite so satisfying consequences for the market. While we don’t
have enough information to really define in detail the exact
situation, we can speculate a little based on this information and
at least improve our perspective. It is reasonable to assume that
Chris’ information shows that some local areas are not in balance,
but when these areas are added together it appears that they are in
balance in “total.” Thus, there may be areas where there are high to
moderate vacancies and other areas where the occupancies are very
high. For example, our informal survey indicates that both Raleigh,
Columbia and possibly Charleston are beginning to see higher
vacancies than they have recently experienced. The difficulty is
that developers are attracted to areas with low vacancies and not to
areas with decreased occupancies therefore causing the new
development to be concentrated in a few local prosperous areas.
Let us use a very simple hypothetical situation to illustrate the
impact that this could have on a local market area. Our example is a
trade area of about five miles in radius with five projects of
50,000 square feet each and each with a current occupancy level of
90 percent. The market is now in equilibrium. However, assume that a
developer (more on who this might be, later) decides that the
Carolinas are in supply and demand balance and that this area is the
best place for another project of 70,000 square feet. Apply a little
math and it can be seen that this “good’” market has been
transformed into market that has an average occupancy of 70 percent.
(The calculation is: 250,000 sq. ft. x 90% = 225,000 sq. ft. of
demand, ÷ 320,000 sq. ft of supply = equals 70%.) It is clear that
being one of the few areas in the country that are perceived to be
in equilibrium may not be an enviable situation if developers still
have cheap money. If your local trade area is selected by the
developer for building, it brings new meaning to the term “lightning
striking.”
This situation is compounded by the fact that the Carolinas’
economies are at least modestly unstable and uncertain at the
moment. Several economic sectors of recent strength, textiles, fiber
optics, farming, and furniture are now soft and the recovery in
these sectors will likely reflect the general national recovery.
Look Who’s Coming to Dinner
The news of the recently formed partnership of Shurgard and
Morningstar indicates that Shurgard views the Carolinas as great
opportunity for the future—as well it should. However, it is also
clear that their stated intention is to develop more facilities.
Several of our contacts have indicated that another large, very well
capitalized developer and owner may have significant designs on the
Carolinas. These exceptionally large developers’ building programs
are more long range and they have almost an unlimited access to
development funds. Thus the usual constraints on development do not
apply to them.
Some Comments on Market Specifics
Almost all of the Carolina operators that we surveyed said that
there was evidence of a slow down prior to 9-11, but that events in
New York and Washington actually exacerbated the negative
circumstances. Many operators have reduced rates since 9-11, but
they have slowly begun to raise the rates again. Occupancies have
not generally fully recovered and some operators feel that the slow
market will persist until the direction of the economy is more
clearly improving. Many of the rate reductions were not “posted” but
merely negotiated or discounted on a particular unit size. Some of
the discounts were simply “move in” discounts of the “one month free
variety.” All of the operators said that the customers were more
likely to be rental rate sensitive and were rate shopping among
their competitors.
The retirement areas seemed to be holding up quite well as might be
expected. However, although rental rates did not seem to be as much
of an issue, there were some large vacancies starting to appear. The
operators attributed this to higher levels of affluence and that
9-11 did not impact retirees in the same way.
One large operator actually opened a new site and the project broke
all rent up records for the company, proving that there are indeed
still under-served pockets in the market.
Very Cautious Optimism
It is clear that the markets in both North and South Carolina are
currently among the most stable in the nation and that the long-term
prospects for these two vibrant states are very positive. Most of
the problems that our survey revealed could be reasonably classified
as concerned complaints rather than serious economic difficulties.
However, new developers should be very wary and do a thorough
feasibility study on the local trade market before considering a new
self-storage project.
As one of the operators said, “The era of build it and they will
come, is now over.” We have also learned then ear future for
self-storage success in the Carolinas is largely dependent on the
same factors that impact self-storage in the rest of the country—the
general economy and growth. All that said, keep in mind that while
the state and local economy is important, the real success of your
facility is most significantly determined by what happens in your
trade area.
Dale C. Eisenman of Midcoast Properties Inc. if the Argus Real
Estate Affiliate in North and South Carolina. Michael L. McCune is
president of Argus Real Estate Inc., based in Denver, Colorado.
Stay the Course
Market equilibrium is defined as a balance among the supply of
self-storage and demand demonstrated in the market. This balanced
market condition of equilibrium is demonstrated in the states of
North Carolina and South Carolina. For example, utilizing
econometric demand models, actual demand as demonstrated by existing
supply in the market and indicated demand as demonstrated by
demographic variables in the model are approximately equivalent.
The econometric model is based on multiple variable regression to
demonstrate a relationship among demand (measured in terms of square
feet per person) and four variables: population, percentage of
renters, household size and average household income. The
correlation or association of the data in a linear relationship
(correlation coefficient) suggests these variables can be used to
estimate market demand for self-storage property. Under these
parameters, market equilibrium is demonstrated in both states (in
terms of square feet per person) as summarized in Table 1.
Mathematically, the data suggests that supply exceeds demand
slightly. However, the variances are not considered to be
statistically meaningful. For example, if demand is the exact same
number as supply it would be “perfect” equilibrium. In reality, the
mathematics of self-storage economics is rarely perfect. Thus, the
variance in North Carolina is less than four percent (-3.55%) and
more than eight percent (-8.49%) in South Carolina. Considering
stabilized vacancy is generally measured at 10%, the variances in
these states are not large enough to indicate over-supply.
The data suggests a cautious approach to self-storage development is
warranted in these states. For example, additions to supply without
population growth will saturate these markets. This underscores the
wisdom that self-storage is a neighborhood business. Local
neighborhood analysis is particularly important in these states that
are approaching market conditions of over-supply.
R. Christian Sonne, MAI is principal of Self Storage Economics, a
data, research and analysis firm specializing in the self-storage
asset class. Chris is a Member of the Appraisal Institute and has a
Bachelor of Science Degree from the University of Utah.
This article is provided courtesy
of Tech-Fast Metal Systems
with the permission of
Mini-Storage Messenger
magazine. © MiniCo, Inc. All Rights Reserved. It is not
intended for further reproduction/distribution without the exclusive
permission of MiniCo, Inc.
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