FEATURE ARTICLE, MARCH 2005

California-based Lockaway Storage has purchased several properties in Texas within the last year.

Self-storage facilities have thrived in Texas for a number of reasons. Start with the fact that most houses in Texas are built on slabs, so storage space in the home is at a premium. Other factors contributing to self-storage demand are the need for a climate-controlled environment due to the state’s heat and humidity, recreational vehicle and boat parking, the significant presence of military bases and personnel, and the state’s large and growing population.

Texas is certainly big enough to accommodate a number of investors, from the single-property owner to the multiple-property developer. John Muhich, managing partner of Austin-based AAA Storage, has developed more than 40 storage facilities in seven metropolitan areas and three states. His Texas developments are concentrated in the central and southern parts of the state.

“We have chosen to develop facilities rather than purchase existing ones,” Muhich says. “This allows us to phase them in order to get the most effective mix of units and climate controlled spaces to meet the market demand.”

While keeping seasoned properties is generally his business plan, Muhich indicates that he has averaged the sale of three properties per year during the last few years.

“I expect development activity to be curtailed in the foreseeable future,” Muhich says. “In the last year, steel prices have doubled and concrete prices are up 30 to 40 percent.”

Out-of-state investors have become more attracted to Texas. Michael Garrity, partner in Aptos, California-based Lockaway Storage, began his self-storage career in California. While his company still has a number of holdings there, it has purchased properties in Texas within the last year.

“The large population in Texas justifies a number of properties in a number of markets for the long term,” Garrity notes. “There are properties available for purchase, properties to choose from, unlike in some other states.”

Acquisitions are reflective of an active investment market for self-storage properties. Investors are interested in self-storage properties despite substantial development in the major cities in recent years, which has resulted in lower occupancies, decreased absorption and flat rental rates. Fundamentals, then, are tending to mirror those of other commercial real estate property types.

Mark Keys, a San Antonio real estate broker specializing in self-storage property sales through the ARGUS Self Storage Sales Network, has seen between 2 and 5 percent of the total properties in the market change hands annually.

“Sales activity reached record levels in 2003 and 2004,” says Keys. “REITs have reduced their acquisitions, but private investors have taken up the slack, especially individuals, who are completing more purchases than large operators.”

Owners can also benefit from the Texas Mini Storage Association (TMSA), which has almost 2,300 members representing nearly 2,700 properties. This makes it the largest state association in the self-storage business, according to Ginny Sutton, the association’s executive director. “Our focus is to provide everything we possibly can to help our members operate their facilities efficiently and profitably,” says Sutton.

Property management companies — fee managers, owner-operators and national companies — are being challenged with some softer markets, mostly due to new developments in major cities.

“Lease-ups are taking longer,” says Bob Hanson, president of Weigand-Omega Management Inc. “And people are selling specials rather than their products, creating short-term users, which can hurt the economics of a property.” Weigand-Omega, a fee manager of self-storage properties based in Wichita, Kansas, has been active in Texas for 11 years and currently manages 13 properties in four cities, including Dallas and Houston.

The abundance of low-rate capital has been a potent driver in the Texas self-storage market. Numerous life insurance companies, conduits and credit companies are actively providing permanent loans on acquisitions or refinances of stabilized properties. Regional and local banks have provided construction and bridge loans for newer properties.

The basic components to support continued growth and sustain profitable operations remain in place: abundant land, receptive local governing authorities, population growth and a good economic environment. A short-term slowdown in development may be good for the market. Overall, self-storage is on the map in Texas and will stay there.

Thomas A. Vrabac is a vice president with Collateral Mortgage Capital. He is based in Mission Hills, Kansas.

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