Shawn Hill | Sep 12, 2019
As a commercial mortgage professional with a niche specialization in the self-storage sector, we routinely work with investors who are looking to acquire storage properties to help them “screen” their investments and analyze their financing options. Finding properties today is no easy task, and one of the most common frustrations we encounter from these investors is their inability to locate deals in their home market that make sense from an economic perspective, particularly given the low cap rate environment and pressure on the sector as it has become increasingly mainstream.
Often times an easy recommendation is to look out of market; after all, with the depth of third-party management solutions, and an abundance of financing options that do not require the operator to reside in market, there exist many alternatives for investors to consider…like Arizona for example! Why Arizona, you may ask? Well, let’s take a look.
Let’s start with the obvious…the weather! First and foremost, we all know self-storage is a demographically driven business, and sunshine and warm weather never goes out of style. To be certain, it is a safe bet that over time Arizona will continue to attract people who are looking to relocate to, or purchase second homes in, a state that boasts one of the most desirable climates in the US. In addition to positive net migration, it’s no surprise that with its vibrant population of snow birds, there exists a very high rate of second home ownership and seasonal migration in AZ…with no hurricane or earthquake insurance required! These second homes are occupied by their owners during the beautiful Arizona winters, and rented during the “off season”; this rental aspect, combined with the desire by their owners to avoid carting items back and forth, creates an inherent demand driver for storage.
Speaking of demand drivers created by the favorable climate, did you know this fun fact…the state of Arizona boasts the highest boat ownership rate of all states and is also an RV mecca? It’s no surprise, therefore, that there exists incredible demand for Boat and RV Storage in AZ, as most owners of “big boy toys” find themselves compelled to rent self-storage, primarily because modern HOAs prohibit the owners from parking these vehicles in their driveways or backyards.
Another compelling reason to look at Arizona is the favorable tax environment for investors. Arizona offers many quantifiable economic benefits over other states such as a simplified tax structure, business-friendly regulatory environment, lack of estate or inheritance taxes, and low state income tax. Importantly, Arizona is one of only ten community property states, which means that as an owner of assets in Arizona, you qualify for a step-up-in-basis twice: once for the surviving spouse, and again for the heirs. That avoids capital gains taxes on the appreciated value of your assets…twice!
Arizona is a diverse state and offers a variety of alternative markets for investors to consider. Aside from 2 of the “Top 100” MSA markets, there are many smaller and even rural markets in Arizona with Class B and C properties that offer great “value add” opportunities. These older stores are often antiquated and may suffer from legacy owners who do not adhere to modern management practices such as revenue management, tenant insurance, and modern technology. Value add facilities are always in demand and never go out of style, and Arizona is a great place to look.
Oh, and if all this is not compelling enough, did you know that according to Yardi’s monthly reports, Phoenix is one of the few markets in the country where rental rates have continued to rise?!
The BSC Group is proud to co-host the 21stAnnual Arizona Self-Storage Conference on September 25-26, 2019 at the beautiful Wild Horse Pass Hotel & Casino in Chandler, AZ. If you are interested in investing in AZ then I would strongly encourage you to come check out this not-to-be-missed event.