Let’s never forget that all real estate is cyclical. What has made these cycles in Arizona among the most dramatic in the country (along with Las Vegas) is a dangerous brew of the following ingredients: an abundant supply of inexpensive land, a disproportionately high number of real estate developers, relatively low construction costs, and minimal barriers to entry. If you are a self-storage property owner in Arizona, I know what you’re saying to yourself right now because I’ve heard it before. Responses follow along the lines of, “Wow! Self-storage is great! I can build properties, fill them up, and make great money by either operating them or selling to one of the big owners. What a great business. This market is never going to change! It can only get better!” Weren’t you also saying those things just prior to the downturns in 1986 or 1999 or 2007? These two clichés say it best: “Excessive profits breed ruinous competition,” and “If you don’t learn from history you will be doomed to repeat it.”
you are a self-storage property owner in Arizona, here are a few questions
coming from a realist that you should ponder. Since 1986, I have been selling
nothing but self-storage properties. That is a very long time. In those 31
years, I have witnessed major market swings in both directions. I have seen
fortunes made and fortunes lost by investors and owners who either recognized
leading indicators to a changing market or did not. When the market cycles, as
it certainly will, you must make sure you have a chair to sit down in when the
survive these down markets and thrive in the up markets that follow, one must
recognize those leading indicators. Whether you are an instructional owner or a
mom and pop, for every property you own, ask yourself:
Are the demographics, specifically population
totals, increasing or decreasing within three miles?
What are the demographic projections for the
next three, five, and 10 years?
How much new self-storage development is
planned or anticipated within that same area? This will require research.
What is your occupancy now?
What do you project your occupancy to be in
the next three, five, and 10 years? Consider population growth and new storage
development when answering this question.
Are jobs moving into the area or are they
leaving your market area?
Check resources, then ask yourself
intuitively: Where will interest rates be in the next three, five and 10years?
If you have financing in place, when is it
due? And, how will those due dates line up with forecasted increases or
decreases in interest rates?
be safe, you should do some worst-case analyses on each property. It is
important to know what indicators to be on the lookout for, specific events or
trends that might indicate the start of a downturn:
At current rents, at what occupancy level do I
break even on my operating expenses on each property?
At current rents, at what occupancy level do I
break even after I pay expenses for capital improvements and loan payments?
What is my capability to remain competitive by
reducing rents or initiating creative concessions to get to break-even numbers at
the current occupancy (a more thought-provoking risk analysis, but important nonetheless)?
you are an institutional owner or own a single property, detail your answers to
What is my exit strategy for each and every
What are the tax consequences likely to be for
those exit strategies?
If I chose to leave a property to an heir, are
they able to or even interested in dealing with asset management and disposition
of those properties? Are they prepared for that or should you consider
Can the cost of your administrative staff be
made more efficient to survive management changes brought on by market or
ownership changes? Or, will you face painful layoffs if our overhead is too
bottom line: Do not be unprepared for a swift and dramatic change in market
conditions. Do not be surprised when analysts tell you that because there was a
massive increase in self-storage inventory in the market (or apartments, or
hotels, or shopping centers), properties are now facing occupancies of half of
what they were during market peaks. These cyclical circumstances can make it
difficult or impossible to refinance existing debt without infusing substantial
new equity. Be prepared! Ask yourself and your staff these tough questions and
get ready for the unexpected.
To put this in context, here are some metro Phoenix market statistics:
During the first half of 2017, there were about 17 self-storage property sales in the greater Phoenix market area. Many of these sales were Class-C assets, as opposed to the larger number of Class-A assets that traded in 2016. Averages of the primary indicators of value for sales closing year-to-date through June of this year, as well as data for the preceding four years, is depicted on the chart below. This year’s sales closed at an average price per foot of just over $65. Note that the range is from $21 all the way up to $126. The peak year for Class-A property sales was 2016, as indicated by the highest price per foot as well as the largest transaction size and lowest cap rate. The chart below contains some very interesting information, so take time to study it closely.
you consider all the recent development and the potential for additional new
development as will be discussed below, you should not lose sight of just how
much population totals will have to grow (at a demand factor of six square feet
per capita) to keep pace with this new development. It is this disequilibrium
that has caused buyers who’ve historically acquired new properties at Certificate
of Occupancy to move to the sidelines.
to our research, 23 active self-storage sites are available for sale in the
metro Phoenix market. These sites range in size from one acre up to about 10
acres, with prices ranging from $1.96 per square foot in a more rural area, up
to $9.45 per square foot for a more urban site. This is an incredible amount of
self-storage land for sale, more than I have seen in many years. Five of those
properties have approved plans in place for self-storage development. We found
an additional five properties in the entitlement process over and above the 23
that are for sale. Several of these properties will be over 150,000 square feet
in size. There appears to be a trend toward building much larger properties,
which is new to the Phoenix market.
to 2016 saw dozens of new properties enter the market, and the total new
product entering the market has been estimated at over five million square feet
by the end of 2017! This all contributes to a massive increase in self-storage
supply, one we have never seen.
fill all these new properties, it is nice to know that Business Insider Magazine recently named both Phoenix and Tucson as
two of the Top 10 US Cities where everyone wants to live, citing population
growth rates and migration ratios, rating them no. 6 and no. 9, respectively.
And, according to the U.S. Census Bureau, Maricopa County’s population grew a
whopping 11.2 percent between 2010 and 2016. If the population of Maricopa
County is now over 4.2 million, how many square feet of self-storage is
estimated to be required in the market? Only 21 million square feet, but the
market is on track to increase to over 30 million square feet by the end of
2018, indicating we may once again be headed towards oversupply. 1.8 million more
people need to move into Maricopa County to keep self-storage occupancy up to
market supply and demand equilibrium.
development first began in Arizona, this state has dealt with dramatic,
whip-saw real estate cycles. Arizona has always among the first to suffer the
negative effects of downturns and among the first to recover from them. When the
market turns here, we lead the pack with large and rapid movements in either
direction. When this market turns, as it surely evenly will, it will be felt
Bill Alter has been a self-storage sales specialist since 1986 and has been involved in the sale of over 150 properties. He is managing director of the self-storage specialty group at Rein & Grossoehme Commercial Real Estate.