The Northeast:
A Market Of Contradictions
By Michael L. McCune
The Northeast has consistently been one of the strongest markets in
the country for self-storage. Rental rates and sales prices have
confirmed this strength and have also invited new competition to
join in the good times. However, this simple picture of the
Northeast market becomes somewhat more complex as we become more
discriminating about the underlying data and trends. First, before
we get to the Northeast, let us take a moment to get a perspective
of the broader national market as to the investment value of
self-storage projects so that we can put the Northeast in the proper
context. This distinction is important so that we do not confuse
nationwide trends with purely regional trends for buying and selling
self-storage facilities.
Interest Rates—The Rose Colored Glasses
We have recently seen the lowest interest rates in several decades.
Low interest rates are very helpful to both buyers and sellers.
Buyers find that with the favorable interest rates available today,
a deal bought on a 10.5 cap rate can generate 16 percent cash on
cash return. Likewise, sellers find that properties sell quicker and
with fewer complications than when interest rates are high. Thus,
these unusual times tend to make all markets look better. Indeed the
level of interest rates is such a powerful motivator of good
markets, investors and operators alike often find it difficult to
find any negatives in any market. It is very important to remember
that the low interest rates that make the world a better place for
buyers and sellers also encourages new development. New development
can dramatically change both the supply and demand for self-storage
and thus materially impact both the value and liquidity of
self-storage investments. However, despite the “glow” that low
interest rates bring to the current market, there are distinctions
to different markets and their relative health.
A View Of The Northeast From “30,000 Thousand Feet”
A quick look at the side bar (kindly provided by Chris Sonne of the
Sonne Group based in Huntington Beach, Calif.) shows us some very
interesting statistics on the Northeast self-storage market in terms
of the supply and demand balance for rental space. He has done some
very cutting-edge and interesting analyses of self-storage markets.
He has found correlation between several different demographic
characteristics and the balance of supply and demand in various
areas. He has then taken these relationships and applied them to the
demographics of other areas to develop the forecast of potential
demand for the area under study, in this case the Northeast Region.
The math to make these calculations is both mind numbing and
remarkably reliable.
A review of Chris’ numbers indicates that for the whole of the
Northeast, and all but two states in the area, there appears to be
more potential demand than current supply. These numbers indicate
that, on balance, investments in self-storage in the Northeast have
the potential to continue to prosper. However, as Chris points out
in the footnotes “It is important to remember that self-storage is a
highly localized business.”
Thus, while we find this analysis and the resulting potential trends
in self-storage supply and demand encouraging, it is imperative that
we look further to really understand the individual markets. To stop
our review at this point would cause us to be shortsighted on the
market—it would be like saying that the dog called Spot is the color
gray, thus missing some very important details about the dog.
Northern New England
Maine, Vermont and part of New Hampshire share the same market
characteristics according to veteran market watcher (and maker), Joe
Mendola. He opines that these markets have really “caught on fire”
from a development standpoint in recent years. Development has been
very active, and many new smaller projects have been built in all
three states. Rental rates and values have tended to hold up well,
but if the development continues at the current pace, over building
will soon knock the supply and demand equation out of balance.
Chris Sonne’s report already reflects this trend of over
development. The self-storage development that is occurring is the
traditional drive up, one story product usually built by local
contractors and developers. One unnamed wag suggested that if you
have a pickup and a screw gun, you are by definition a self-storage
developer in Vermont.
It is very likely that localized areas of over building are
occurring throughout the northern tier of New England. With
relatively low barriers to entry, the impact of over development can
have a both a significant and long-term impact on the operational
results and value of nearby existing projects. Potential developers
and investors would be well advised to make a very careful study of
the local market conditions prior to making investment commitments.
The Greater Boston Area And Manchester, New Hampshire
The Boston area had been slower to develop both demand and supply in
the past, but in recent years both have exploded. Conversions of
existing warehouses and mills have been a significant factor in
adding supply in Boston, especially inside Route 128. The lack of
available land, zoning restrictions in general and the Boston
Redevelopment Authority in particular has made development not only
difficult, but also very expensive. This arduous development
environment and high value property has meant that development tends
to be dominated by the larger and well-financed players. It has been
reported that a one-acre site on Interstate 93 was recently
purchased for self-storage for $3,600,000 and had zoning for about
90,000 square feet of storage. Clearly, this is a market for
wellfunded developers and for detailed feasibility studies. Rental
rates continue to support the rising cost of development as demand
continues to exceed supply.
Moving north to the Manchester, New Hampshire area is, in most
respects, simply a continuation of the Greater Boston market.
Manchester has seen some of the mills of the 19th Century converted
into the uniquely late 20th Century use of self-storage. While the
rental rates are not as high as in the Boston area, the larger
developers and investors have become more dominant. The larger
players are seriously looking as far north as Concord. Some
significant softness in the market in specific locations is being
experienced.
New York Metroplex Market
The New York Metroplex means all of New York City, the Southwest
coast of Connecticut, Long Island, most of Westchester County and
North and Central New Jersey. For the last several years this market
has experienced fast growth in self-storage facilities. Most of the
growth has come from the large brand names, building first class
third generation properties with climate control. The quality bar
for self-storage has been raised significantly, and for the most
part, renters seemed to be satisfied paying the price for these new
generation projects.
Today, there is genuine softness in some of the micro markets in the
Metroplex. Some operators are complaining that other operators are
offering unnecessary discounts. This trend first appeared in early
2001 and was exacerbated by the events of September 11th. The
question is: where does the market go from here?
Some suggest that that there are many positives in the market today.
For example, the recession is about over according to the
statistics; the ramifications of September 11th has become more
clear; and the statistics from Chris Sonne would indicate that the
area has some of the lowest supply numbers anywhere. This may
indicate that despite the minor economic blip, the area can still
support more growth.
However, there is another school of thought that speculates that the
recent rise in the general quality and cost levels has raised the
price point to a level that the affordability of self-storage has
been reduced, and thus the total demand at the higher prices is not
growing. Add to this thought the notion that Wall Street will
continue to have employment problems, interest rates may go up and
slow the economy again—you may have an entirely different picture
for the New York Metroplex.
A Conclusion, Not An Answer
If only one thing is consistent about the self-storage market in the
Northeast, it is that there are many loose cannons rolling around on
the deck. In an environment such as this it extremely important when
making your investment decisions, either to buy or to build (or for
that matter, sell) that you must do your market homework. Your
square nine miles are your world and you must know everything that
is or will go on there. Feasibility studies are an absolute must.
The more detailed the study the better and the preparer should be
absolutely independent. This is not a time to believe the study
prepared for the lender.
Self-storage in the Northeast, or anywhere, is no longer a “field of
dreams” and quality feasibility analysis is the only way to
determine the market for your product.
Michael L. McCune is president of Argus Real Estate Inc., based in
Denver, Colorado. Argus operates and manages the Argus Self Storage
Sales Network, the nation’s only network of brokers dedicated to the
buying and selling of self-storage facilities.
Northeast Region Market Snapshot
How Much Is Too Much?
The age-old question of self-storage economics has been how much is
too much? Historically, demand for self-storage facilities has been
measured in terms of a stagnant, supply side model. As the industry
has increased in investment, the requirements and measurements of
market analysis have also increased for the self-storage asset
class.
Market demand for self-storage product is measured in a dynamic,
econometric model. Utilizing multiple variable regression, a
relationship is indicated among demand (measured in terms of square
feet per capita) 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, the New England Region is summarized (in terms of square
feet per capita) along with a graphical view in the charts be low.
The analysis suggests that the market supports a cautiously
optimistic approach to development and investment of self storage
property. As outlined in the 2002 Self-Storage Almanac, it is
“important to remember that self storage is a highly localized
business”. Therefore, these snapshots are intended for general use
only. A local trade area analysis is the best tool for making
decisions about self-storage property.
|
Northeast Region By State |
|
State |
|
Existing Supply |
|
Forecast Demand |
|
Variance |
|
Condition |
| Connecticut |
|
2.39 |
|
3.55 |
|
1.16 |
|
Under-Supplied |
| Maine |
|
3.74 |
|
5.46 |
|
1.72 |
|
Under-Supplied |
| Massachusetts |
|
2.47 |
|
3.76 |
|
1.29 |
|
Under-Supplied |
| New Hampshire |
|
5.87 |
|
4.51 |
|
-1.36 |
|
Over-Supplied |
| New Jersey |
|
1.85 |
|
3.49 |
|
1.64 |
|
Under-Supplied |
| New York |
|
1.68 |
|
3.15 |
|
1.47 |
|
Under-Supplied |
| Pennsylvania |
|
2.93 |
|
4.79 |
|
1.86 |
|
Under-Supplied |
| Rhode Island |
|
1.93 |
|
4.2 |
|
2.27 |
|
Under-Supplied |
| Vermont |
|
6.27 |
|
5.2 |
|
-1.07 |
|
Over-Supplied |
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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