The U.S. oil industry is producing new hot spots for growth that are sparking the interest of self-storage investors.
“In Texas, North Dakota, New Mexico and certain parts of Ohio—really anywhere that there is an oil boom—we have seen incredible demand for self-storage products, which has led to increased net operating incomes and increased values for properties,” said Ben Vestal, president of the Argus Self Storage Sales Network in Aurora, CO.
An oil boom often produces a ripple effect of positive economic growth across a region. The surge of workers pouring into an area to service the oil industry typically creates a need for more infrastructure and services, ranging from housing and grocery stores to restaurants and hotels. That growth is driving development in some markets where, frankly, there hasn’t been any new self-storage construction in years, Vestal said.
North Dakota’s oil boom is putting that state on the map for potential investors. Closing in on 1 million barrels a day, North Dakota now ranks second only to Texas in oil production. “We think there are significant opportunities there,” said Peter Elzi, a principal at land planning firm THK Associates Inc. in Aurora, CO.
THK has conducted self-storage market analysis for clients who’ve been eying potential investments near the Bakken shale in western North Dakota—specifically in the cities of Williston, Dickinson and Minot.
Existing self-storage units in those three cities are pretty much 100 percent occupied, with a number of facilities reporting they’ve got waiting lists, according to Elzi. In addition, most of the existing facilities are quite old, with gravel and dirt parking lots and few amenities. Furthermore, few units in the area are climate-controlled, which Elzi said is “mind-boggling,” as the region experiences temperature extremes in the summer and winter.
“All of those markets are in great need for new, modern facilities,” Elzi said.
North Dakota’s rental rates aren’t high by national standards, largely because of the age of the facilities. In Minot and Dickinson, average monthly rents are 50 to 60 cents per foot. The Williston area is commanding slighter higher rents, as that’s where much of the significant growth related to the Bakken has happened. Self-storage facilities in that area are seeing monthly rents average about 75 cents per foot, according to THK, with some newer facilities commanding rents up to $1.30 per foot.
A key question for investors is whether this oil-fueled growth is sustainable. Oil markets are notorious for their boom-and-bust cycles. Historically, oil booms have lasted five to 10 years. “In the Bakken, we firmly believe that this is not a five or six-year cycle,” Elzi said.
Based on current technology, companies are drilling at a rate of 2,500 wells a year, with the total amount of accessible oil reserves estimated at 50,000 to 80,000 wells. That puts the drilling timetable for that oil at 20 to 30 years.
Texas has long been a leader in the oil industry, and the heart of the current growth is the Midland-Odessa area of West Texas. The region has been recognized as one of the fastest-growing metro areas in the U.S. It was that growth that prompted real estate REIT W.P. Carey Inc. to buy four properties in Midland-Odessa last December. The four properties comprise 2,541 units and span 361,940 net rentable square feet.
Despite the Midland-Odessa area’s growth, W.P. Carey did a significant amount of due diligence before committing to the deal. The company was wary of investing in an oil-driven economy.
“If you are a long-term holder, like we are, you want to make sure there is sustainability there, and it’s not just a five-year boom and then you have problems on the downside,” said Ann Coolidge Taylor, managing director in the Dallas office of W.P. Carey. The REIT holds ownership stakes in about 170 self-storage facilities in the U.S.
One factor that helped put W.P. Carey at ease with the West Texas acquisition is new hydraulic fracturing, or “fracking,” technology. Some data suggests fracking makes it economically feasible to drill even if the price of oil were to drop by up to 30 percent, Taylor noted. In addition, the area also is seeing new industries popping up alongside the oil. For example, Seattle-based Summit Power Group is building a $2.5 billion clean-coal facility near Odessa.
W.P. Carey’s Midland-Odessa properties, which operate under the CubeSmart brand, are experiencing average occupancy rates of more than 90 percent.
Barriers to Entry
While the growth opportunities are attractive and potentially lucrative, getting a foothold in oil-rich markets is not easy. “The biggest barrier to entry is finding capital,” Elzi said.
Fearing bust part of the boom-and-bust cycle, banks are wary of lending money in oil-boom regions. And then there are development challenges. In North Dakota’s Minot-Dickinson-Williston area, land prices have spiked thanks to increased commercial development, and obtaining industrial zoning for land near residential areas can be difficult.
The remote areas of North Dakota can be a tough sell for some national investors. “I don’t think the national players will be going to a Williston, North Dakota, anytime soon, simply because the scale of operation up there for self-storage is better suited to the local and regional operators,” Vestal said.
However, North Dakota is seeing more out-of-state interest from regional investors. Argus recently brokered the sale of a property in Williston to an investment group from Aspen, CO.
Yet another barrier to new construction in oil markets such as West Texas is a shortage of resources, such as construction workers and equipment. Self-storage tends to fall fairly low on the priority list for infrastructure projects in oil-boom areas. At the time W.P. Carey was considering its Midland-Odessa acquisition, seven hotel projects were under way in the region.
“When some of the infrastructure has been built out and there are extra resources for self-storage, then there will be the demand to accommodate the extra supply, because it is an area of high growth,” Taylor said of Midland-Odessa.