Self-storage investors find strong prospects in NWA

New construction and development have been prevalent across Northwest Arkansas, and the self-storage sector is no exception. Whether it’s brand new ground-up projects, expansions or remodels, developers have been addressing this asset class across the two-county area.

The growth in self-storage facilities in our region is consistent with national trends, with the U.S. seeing some of the highest levels of new construction in years. Many of those in the industry point to a shift in demographic and lifestyle factors, along with a robust national economy, as reasons for the growth.

Based on internal research utilizing data obtained from the assessors’ offices, there are about 6.35 million square feet of self-storage inventory in Washington and Benton counties combined. The inventory in 2014 was approximately 5.34 million square feet. This represents inventory growth of about 1.01 million square feet, or 19%, over the past four years.

The rate of growth in Washington County during that period (20%) is just slightly above that of Benton County (18%). Benton County accounts for almost 60% of the current inventory.

In addition, there is more product on the way. Based on in-house research, with the assistance of local planning officials, there are nearly 260,000 square feet of self-storage space currently under construction and another 630,000 square feet or more in various design review stages seeking final approval. The total roughly 890,000 square feet in the pipeline represents 14% of current inventory. Of the total pipeline square footage, more than 70% is in Benton County.

Despite the rising inventory since 2014, vacancy rates seem to be at healthy levels overall. Discussions with property managers representing more than 20 storage facilities across the two-county area indicated vacancy rates typically ranging from below 1% up to near 10%. Vacancy rates are the lowest during the summer months, with this particularly true for properties heavily influenced by the University of Arkansas community. Nearly all managers contacted reported an uptick in rental rates over the past 24 months.

There has been strong investor interest for existing product as well. Based on internal research using public land record databases, there have been more than 25 self-storage facilities change hands in the two-county area over the past 24 months. These sales represent total transaction value of just over $57 million. Nearly one-half of the transactions were $2 million or more. Many of the facilities have undergone re-branding and/or renovations since they were acquired.

The Northwest Arkansas market has experienced a surge in self-storage construction over the past few years, and this is likely a result of low vacancy levels and rising rental rates, together with a strong local economy and larger national trends. Our research suggests vacancy rates in both counties are at healthy levels. Stakeholders, however, will need to monitor the amount of new product being delivered to the market over the next six to 18 months.

Continued population and employment growth can help keep supply and demand in check. Not unlike any other real estate endeavor, property-specific factors such as location, building design and amenities, and management also play a critical role in the performance of self-storage facilities.

Editor’s note: Jordan Karnes works for Reed & Associates Inc. in Fayetteville and provides research, feasibility and valuation services for the real estate sector. The opinions expressed are those of the author.