Los Angeles, California:
How Is Self-Storage Faring In The City Of Angels?
BY R. CHRISTIAN SONNE
Los Angeles is often called the city of angels, derived from the
Spanish origin of the city name. In the self-storage market, the
angels can be elusive in this immense region.
Consisting of a geographic area over 34,000 square miles, the Los
Angeles region includes five counties extending from the Pacific
Ocean east to the California-Arizona border. Fueled by a population
of 17 million people, the Los Angeles region has among the most
diverse and large economies in the world. Based on 1999 gross
regional output of $537 billion, the regional economy is exceeded by
only 10 nations in the world, surpassing India in 1998 (IMF). Los
Angeles County by itself ranks as the 15th largest, while the State
of California ranks seventh, just before China.
Self Storage Market Conditions
In terms of self-storage supply, Los Angeles County and California
are below state and national averages. In peer group analyses of the
United States by state, the 2003 Self-Storage Almanac reports that
existing supply is 3.79 square feet per person compared to existing
supply nationwide of 4.33 square feet per person. Moreover, Los
Angeles indicates a supply of 2.20 square feet per person compared
to demand of 1.92 square feet per person (essentially at market
equilibrium). Yet, there remains significant new development
searching for the under-supplied neighborhoods or angels within this
huge region.
In California, beginning in 1995, self-storage REIT’s aggressively
acquired properties in single and bulk transactions. These
transactions increased the price structure and lowered overall
capitalization rates. However, REIT’s have particular investment
criteria and only first tier properties meet portfolio requirements.
These transactions seemed to culminate in 1997 with the bulk
purchase by Storage USA of the In Storage portfolio comprised of 20
properties throughout the Los Angeles region. More recently (August,
2000), Extra Space Properties sold a $40,000,000 regional portfolio
to General Electric Capital, including self-storage properties in
Burbank and Inglewood. Southern California Edison, seeking to raise
cash, listed for sale a portfolio of power easements (land leases)
available for self-storage development. A newcomer to self-storage
now controls this portfolio, and the property is beginning to be
developed. A StorAmerica portfolio, comprised of 23 self-storage
properties in California, Nevada and Arizona, was offered for sale
as one transaction. In 2002, three of seven transactions were U-Haul
(Amerco) facilities sold in bulk, facilitated by a blanket mortgage
by Merrill Lynch for $65 million.
Brokers such as Don Clauson of Commercial Property Consultants and
Dean Keller of Bancap Self Storage report a decline in first-tier
transaction activity. For example, the amount of single unit
transaction activity is among the lowest in years. With limited
supply of properties for sale and relatively low cost of capital
with wide availability, there has been aggressive new development
among REITs (such as Public Storage and Shurgard), regional
operators (Stor-It and CT Realty) and a plethora of individual
developers. Data trends in the Los Angeles region, as measured by
selfstorage transactions, are summarized in Figure 2.
According to Robert P. Bihr, a lender with East West Bank in Los
Angeles, there is strong competition for self-storage product.
Buyers are looking for stable cash flow leveraged with long term,
low cost financing. Clearly, there are more buyers than sellers.
However, financing angels are also hard to find.
“We are beginning to focus on credit quality in addition to the
collateral value of the self-storage facility,” Bihr notes. “We are
looking to get a handle on supply and demand issues because we have
concerns about lending in over-supplied markets. Getting a handle
includes market studies or appraisals that specifically address the
conditions of supply and demand in the target trade area.” Bihr also
notes that “most of the focus in market studies is on existing
supply, however, we are requiring more analysis on demand side
issues.”
Looking At The Numbers
Self Storage Economics has completed demand studies by major markets
as published in the 2003 Self Storage Almanac. Major markets in the
Los Angeles Region are summarized in Figure 3. As demonstrated,
major markets in the region are at equilibrium. What is interesting
is the variance in the level of demand among these three counties
within the same region.
This underscores the need for local, trade area analysis to get an
accurate snapshot of the selfstorage market for a particular
project. In this regard, developers are expressing growing concerns
of over-building, particularly by newcomers to the industry.
Development strategy is now focusing more on long term hold in a
unique market niche including container storage and adaptive re-use
of existing industrial buildings (change in the highest and best
use).
A comprehensive survey of self-storage product in Los Angeles County
reveals some interesting statistics. There are over 600 facilities
representing over 20 million square feet, with nearly one million
square feet developed over the past two years. Yet, vacancy remains
low, fueled by demand generated in the region by population and job
growth. Occupancy is higher among newer facilities that represent
the latest in security and fire-life-safety technology. The average
age of the existing product is over 10 years old. Specifically,
vacancy at stabilized product is 11 percent—another indicator the
market is near equilibrium. Responding to market conditions, new
self-storage construction continues in the region, leading to
concerns of overbuilding, rising vacancy and flat rents. Totaling
over 200,000 units, an average unit size is approximately 100 square
feet. Rental rate data, in terms of range and averages, is presented
[below].
The data demonstrates a huge range to match the huge geography. Some
West Los Angeles neighborhoods command premium pricing among the
highest in the country. Conversely, facilities in remote, desert
locations set the low end of the range. A typical proforma for an
income and expense summary in Los Angeles County will include income
based on $15.00 per square foot per year (including ancillary income
of three percent to five percent, with 10 percent vacancy and 32
percent expense ratio indicating a net operating income per square
foot of $9.18. Utilizing survey research (Investor Survey, October,
2002, Mini-Storage Messenger), a benchmark overall capitalization
rate of 9.50 percent is typical.
Operating expenses for self-storage in Los Angeles are on a full
service or gross basis, meaning all building operating expenses are
paid by the owner, including fixed and variable expenses. Fixed
expenses do not vary with occupancy and include real estate taxes
and insurance. Variable expenses vary with the level of occupancy
and include the following: repairs and maintenance, administration,
on-site management, off-site management, utilities, advertising, and
miscellaneous expenses. Self-storage property rarely incurs reserves
for replacement. Due to a relatively low breakeven point with
respect to occupancy, self-storage expenses tend to be relatively
inelastic or stable (in terms of total amount).
Some operating expenses are no angels! Property taxes in California
are limited by the Jarvis-Gann Initiative known as Proposition 13.
Enacted in 1975 to reduce property taxes, the act places
constitutional restrictions on the method of valuation and
assessment of property taxes. In affect, the maximum tax rate
allowed under this proposition is one percent (plus an increment for
preexisting bonded indebtedness) of market value. Market value
assessments can only be increased by a maximum of two percent per
year, except when a property transfers or undergoes major
construction. This is to the advantage of properties that don’t
transfer ownership, but taxes must be adjusted in the income summary
to reflect “market” based taxes (usually the sales price multiplied
by the tax rate). Property taxes in Los Angeles are among the
highest in the country.
Insurance includes both building and liability insurance expenses.
An upward trend in insurance rates has been significant to real
estate in Los Angeles and is slowly impacting self-storage property.
Poor yields by industry investment (in equities), concerns over real
estate security, and flat rates over the past decade has caused
large increases for some properties. Lower rates can be achieved by
blanket policies with significant rate reductions. Due to the
complexities of insurance, it is critical that insurance is
purchased from companies that know and specialize in self-storage.
In summary, data and statistics compiled indicate self-storage
market conditions in Los Angeles can be angelic. However, due to the
enormity of the market and high price points, there are added
complexities to finding these angels. The key to the angels, local
market players agree, is local market research.
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 also a member of the Appraisal Institute.
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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