Survey: Houston Self-Storage Market

by Aaron Swerdlin, CB Richard Ellis

Historical operating data for the self-storage industry is difficult to find. Comparative analyses can therefore be a very arduous task. However, the Texas Mini Storage Association, in concert with several self-storage real estate professionals, is beginning a four part series covering the major markets in Texas - Houston, Dallas, Austin and San Antonio. This is the first of the series, a focus on the Houston market.

Houston Overview
The focus is on supply growth, rental rate trends and the long-term viability of the market dynamics. Containing more than 4.5 million people (Galveston to the Woodlands and from Katy to Baytown), the Houston metropolitan statistical area is the fourth largest in the United States. With 42 new facilities, 1999 was Houston’s most active year, relative to new construction, doubling the previous high of 20 set in 1995. In contrast, for 2000, the final number was 18 new facilities. In the last 10 years, there have been 181 new facilities built in Houston. Statistically, the market has grown 44% during the last 10 years. By the end of 2001, there will be more than 508 facilities open for business. With an average facility size of more than 56,000 square feet, there is more than six square feet of storage space per person.

Saturation?
One might think with all the new construction the Houston market is saturated. And although we have had negative absorption over the last two years, 2000 by itself actually had positive absorption. The average market occupancy is almost 85% (including all of the new facilities that aren’t yet leased). If we remove the 2000 facilities from the calculation, the market occupancy is almost 90%.

Square Footage
In 1999 there was a total of 1,558,000 square feet of new construction. In 2000, there was 1,074,000 square feet built. What's interesting is that in 2000 we absorbed 2,102,000 square feet...so for 2000 we actually absorbed a positive 1,028,000 square feet. However, with the 1999 new construction factored in we had negative absorption of 530,000 square feet. Luckily, 2000 was a strong year for leasing and a slower year for new construction. And provided the new construction numbers hold for 2001, Houston should see its three year absorption rate go positive by the end of the year. Although the absorption numbers are trending upwards, it appears that it may be occurring at the expense of rental rates. In 1999, non-climate rental rates grew less than 1%. For 2000, rental rates grew 8.4%. So non-climate space certainly has stabilized. Climate controlled space however, has not. For 1999 the rate grew only 1.3%. For 2000, rates actually decreased a staggering 7.57%. This is a very strong indication that some of the climate-controlled premium has eroded and that at least some of the absorption has come at the expense of rental rate discounts and the lowering of board rates. And since almost every new facility is comprised of at least 30% climate controlled space, it’s the newer facilities being hardest hit by the rental rate compression. The other dynamic that must be contemplated is that non-climate rates have increased at a faster pace than climate. This means that while the percentage-delta between the two types of space is shrinking, the dollar-delta is staying the same. This suggests that the premium between climate and non-climate space may not be based on a percentage but rather dollars.

Big Players
The Houston market is 41% owned by companies who own four or more properties—an increase from 35% last year. This obviously suggests that more major players account for a significant portion of the new construction and acquisition activity. The new construction has introduced a couple of new members to the major player fraternity. The positive aspect with such a large percentage of "institutional" ownership is that they tend to aggressively accelerate rates, have a more sophisticated management style and they better educate potential tenants. These are things that help not just them but everyone.

Quality development
Quality development opportunities in Houston are few and far between. With the substantial supply growth during the last 10 years, there is no shortage of class "A" facilities, nor is there a shortage of Class "B" and "C" supply. And with Houston’s job growth projected to far-outpace the rest of the country during the next five years, there is no reason to believe that the Houston market should be tagged overbuilt. However, with the robust economy and the aggressive population growth in Houston, many supply-side mistakes have been well hidden. I am afraid that all it will take to depress the market is slightly slower job growth, slightly higher interest rates or a combination of both. With an 85% overall occupancy it’s hard to argue that there are too many facilities. However, occupancy is an arbitrary number unless rental rate growth, new construction, etc. is also analyzed. I am optimistic about the opportunities that exist in Houston relative to the acquisition of existing facilities, and I remain a weak-neutral relative to additional new construction. With the exception of a few small sub-markets within the city, the fundamentals simply aren’t there to support substantial new development…at least not until the rental rates stabilize and begin regular annual increases again.

Houston Growth Chart