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Self Storage Valuer’s Commentary – 2013

29
Jul

Introduction

Malcolm wrote this personal high-level overview of the Australasian self storage market (“A Valuer’s Commentary”) to the 2012 SSAA Almanac. It reflected on issues that had affected the industry through the year and hopefully provided general information, market context and food for thought to members.

A repeat at the end of this year is likely.

A Valuer’s Commentary

Like everything in life, the general rule is often proved true or false by individual performers – the following commentary should be seen in that context. My overview comments are the end result of many conversations I’ve had around the self storage industry with a range of people.

Each person had a different story to tell, and no two people trade the same. Each business is unique, but the common thread is management expertise. Some will always do better than the norm, others won’t. That creates opportunity.

New Zealand

General Property Market

  • The general commercial property market has shown around 4 years of weaker rentals, softening yields (cap rates), lower land values and reduced construction.
  • While there are signs that the bottom of the property cycle has been reached, indicators are less clear on the road to recovery.
  • Relatively strong growth was recorded at the end of 2010 and into 2011, but in 2012 the recovery turned patchy with slower economic growth. Manufacturing, transport and communications sectors have slowed and companies remain cautious about committing to additional costs.
  • Tougher national building codes and escalating insurance premiums are restricting property development.
  • Consumer spending remains weak, investment and leasing activity remains subdued, uncertainty is still affecting life.
  • The slowing Australian economy is a risk to New Zealand exporters as is the high Australian dollar.
  • Over the last 3 years industrial property average rents have reduced by some 20% – 25%, similarly average sale prices of industrial property is around 40% – 50% below its peak.

What to expect?

  • Unemployment will remain relatively high and if the Reserve Bank keeps interest rates low as expected, annual inflation will most likely remain at or around 2%.
  • Capital values are expected to remain relatively stable with any net decrease coming as a result increasing insurance costs.
  • In the secondary industrial market a large amount of available space will more than likely deter any gross rental increases.

The Self Storage Market

  • The Auckland self storage market outperformed Australia in terms of occupancy and rental growth over the last 12 months.
  • Canterbury and Christchurch are essentially the “Perth of New Zealand”, with all the post-earthquake construction. Demand for self storage is likely to remain strong here for at least another 18 months.
  • The remaining NZ self storage markets are not performing as well, generally still trading below their pre GFC peaks.
  • Self storage remains on a month- to-month trading scenario even though volumes have picked up recently. There is no clear sign of continued and sustained growth visible to date although it is hoped that positive results in late 2012 will continue for all into 2013.

Australia

General Property Market

  • There is ongoing uncertainty and low consumer confidence in the retail sector with cautious consumer spending. This has led to a relatively subdued commercial and industrial property market overall.
  • In a “back to basics” approach, property fundamentals such as location, strong lease covenants, potential for capital growth and pricing, remain keys to demand.
  • Low rental returns, higher yields and weaker capital growth have reduced demand from investors and affect all transactions. However in the higher value and “quality” end of the market, deals are still being done generally amongst national tenants and major property holders. Industrial estates are attracting more owner occupier interest than property investors.

The Self Storage Market

  • Uncertainty and low consumer confidence has negatively influenced demand for self storage, at least in the short term.
  • Households, small businesses, removalists, distributors and local tradespeople who use self storage as part of their life or their businesses are affected. Clients are generally “doing it tough”. Particularly in those areas hardest hit by the economic climate, these factors are translating into stalled occupancy and/or reduced rent roll growth for self storage.

Western Australia (Perth)

  • The West is the stand out performer in a self storage context as in the general economy, led by it’s strong resources sector.
  • The outlook for the Perth industrial market is generally good. Given that over $190 billion worth of projects has been proposed and committed within the resources sector it is predicted that industrial market activity will be driven well beyond 2012. The two tier market, will, however remain. ”
  • The redevelopment of Perth Airport and release of the State Government’s Industrial Land Strategy may ease some of the demand for land within the Greater Perth areas.
  • Self storage pricing has increased above inflation in most areas and occupancies have remained reasonably steady (and generally high).
  • Fly in fly out customers have altered the self storage market to an extent but continued Greater Perth suburban growth underpins demand.
  • Finding development land for self storage at the right location, at the right price, is a major constraint on the growth of the industry. Existing operators are now building second levels to increase the return on their footprint and multi-storey self storage centres are more accepted by clients than they were several years ago.
  • In contrast to the rest of the country Greater Perth self storage operators have confidence in a continuing strong demand for their product and growth in terms of industry size and pricing.

Victoria

  • Over the last 4 or 5 years Melbourne self storage facilities had been trading above the national average, however in the last 12 months, the slowing Victorian economy has put pressure on demand and more discounting and “deals” are being made to secure occupancy, at the expense of revenue.
  • Provincial Victoria – and indeed, provincial Australia – continues to trade in a generally constrained manner, servicing ageing local populations, with small individual facility sizes. The noticeable factor is management with a prevalence of “hands-off” owners or agents unwilling or unable to compete commercially in their catchments against the fewer active owners and managers really working their business harder.
  • Victoria now reflects the Queensland market of several years ago – a difficult and contested storage business environment, more so in some areas than others, with a growing use of discounting apparent to fill space.

Sydney

  • The inner Sydney market and West have remained very tough over the last 12 months compared to the outer urban regions which have not been as badly affected by the current economic and political climate.
  • Job security, the distances to travel to work on clogged roads and the escalating cost of living in an expensive, expansive urban environment forces self storage operators to compete hard for their money in a patchwork of markets delineated by both natural and man-made barriers.
  • Against that backdrop, rental increases are handled carefully as competition escalates placing pressure on occupancy rates, especially in inner areas.
  • Demanding planning laws and the lack of available land with main road visibility is limiting growth of the industry within Greater Sydney.

Queensland

  • Queensland is affected by the “two-tier” economy, in much the same way as WA. Resource sector business activity is strong whereas other sections of the market remain “patchy” and weak.
  • Residential real estate in Brisbane and the South East remains flat with the number of house starts down from previous years and house prices being depressed by the quantity of stock available.
  • The concentration of self storage facilities, especially small ones, in the south-east and on the Gold Coast is the highest anywhere outside the USA. This market has been fairly flat to negative over the last two years. Discounting remains prevalent which while improving occupancy rates impairs actual rental growth and profitability.
  • Provincial Queensland remains a stronger performer than metropolitan Queensland as it enjoys continued resources and infrastructure spending, albeit at a slower pace and under a different political climate than the West.

Canberra

  • The Nation’s Capital is very susceptible to Federal government actions whether it be political announcements or a refocus in government activity, infrastructure spending, commercial leasing activity and land releases.
  • Residential affordability and development growth has slowed although estates continue to grow on the margins.
  • In a relatively small market competition remains strong between the established self storage brands and while the first half of 2012 was difficult , in the last six months the market has picked up with some rental and occupancy growth apparent.
  • Government departments have traditionally rented space with self storage facility operators and with ongoing budget and spending cuts and an Election looming, these may well reduce through 2013.
  • Greater Canberra has traditionally included Queanbeyan, Yass and Goulburn in NSW as its outer suburbs, and these are likely to grow in importance as feeder markets for Canberra itself.

Adelaide

  • An increase in demand for warehouse space that began in 2010 has peaked and fallen away, contributing to a softening of industrial capital values and land prices and an increase in vacancy rates in primary and secondary sectors of the industrial market.
  • Speculative construction of industrial office/warehouse space has fallen away markedly since 2009/2010, and commercial investment yields in Adelaide has softened noticeably.
  • Self storage enquiries are generally down across the Greater Adelaide market.
  • The self storage market is influenced by operators that are negatively affecting pricing sentiment with limited rate increases and discounting. This has combined with genuine affordability issues in some customer segments to produce a flat market, with limited signs of this turning more positive in 2013.

Tasmania

  • Tasmania is doing it tough with the economic resurgence visible several years ago now well and truly gone. Population remains the biggest single driver of market issues in this state.
  • The current government has had little positive impact generally and there is an overall negative business sentiment.
  • There is a predominance of independent self storage operators and no major brands having a significant presence outside Hobart.
  • Storage customers are very price conscious and the prevalence of small, discount – driven operators puts pressure on rents and occupancies in all facilities.
  • Similar to the mainland, advertising spending has changed. Although Yellow Pages still has a grip on customers, there is a greater degree of reliance upon newspapers, the printed word and television compared to the web and Internet users.

Darwin

  • Greater Darwin is reliant upon Government, Defence and the servicing of massive infrastructure projects. New industrial developments continue to be built to service the many trades involved with resources in the NT.
  • With some 20% of the population employed by the Territory or Commonwealth governments, the recent election of a new administration and a mini budget that is cutting costs and staff is leading to growing community stress about jobs and affordability in the local economy. Workers are leaving for jobs in the other resource-rich States due to cost of living pressures.
  • The Darwin self storage user is predominantly highly mobile and comprises of price-conscious locals, workers and backpacker tourists. The transient population, especially in the dry season, can present problems for debtor and delinquency control.
  • The market is dominated by long established and mature self storage facilities with a few strata storage developments thrown into the mix. Discounting is being driven by clients expecting it to be that way, occupancy periods are shorter and enquiries don’t translate easily into reservations.

The Final Word

Customers are ringing around a lot more than they were 12 to 18 months ago and seeking discounts. This is not just relevant to self storage, but is part of a growing discount mentality in Australian consumers. No longer content to pay “ticket prices” for items they are constantly seeking a better deal.

This attitude is further fuelled by those retailers all too keen to give away such discounts without exploring other sales techniques first. This practice appears to have spread into the self storage industry in the past 12 months given the increased level of discounting in the industry and prevalence of pricing in marketing material.

In such a price conscious market, operators have to work a lot harder to convert enquiries but those that do work their sale techniques rather than succumb to easy discounting are rewarded. Operators have spent a lot more time and effort on their online marketing as Yellow Pages rapidly falls into irrelevance. With this shift in marketing spend Google has now become a much more expensive and crowded medium resulting in industry “smart words” becoming much more expensive.

In the current environment, I believe interest in the self storage industry is most apparent in very well informed and advised operators, owners, investors and the sector-alert institutional and property trust market. There have been very few sales of significant (non-distressed) self storage businesses with vendors and purchasers still generally disagreeing on value.

The uncertainty involved with going concern storage businesses means excellence in management performance, operational quality and pro-active planning will remain critical through 2013.