The oil boom and the rapid economic, population and job growth that have accompanied it have pushed North Dakota into the national spotlight. Many people now are mulling the potential for investment and expansion opportunities in this once-quiet market. The question is whether investors are ready to put their money where the potential is.
The focus of much of the attention has been on cities near the Bakken oil fields in western North Dakota, mostly in Minot, Williston and Dickinson. Investors in self-storage — as well as in commercial and residential real estate — are looking to take advantage of the Bakken boom.
“Everyone is here trying to see if they can get a slice of their own piece of the pie,” said Neal Messer, owner and manager of BEE-Bay Self Storage in Dickinson.
Current market fundamentals and forecasts for future demand paint a fairly rosy picture for the self-storage industry. In fact, self-storage facilities in Minton, Williston and Dickinson are at or near full occupancy.
“We’re extremely optimistic about self-storage opportunities up in the Bakken, especially in the major cities of Minot, Williston and Dickinson,” said E. Peter Elzi Jr., principal at THK Associates, a planning, landscape architecture and market analysis firm in Aurora, CO.
Demand exceeds supply
At the end of 2012, THK inventoried all of the self-storage facilities in Dickinson and came up with 129,000 square feet of space that was fully occupied. THK thinks that market is undersupplied by at least 85,000 square feet and will need to add another 320,000 square feet over the next decade. At the time, average rental rates were 50 to 60 cents per square foot.
The story is much the same in Williston and Minot. Minot has a larger self-storage market — about 560,000 square feet at 98 percent occupancy. According to THK, that market is undersupplied by about 85,000 square feet and needs to add another 350,000 over the next decade. Average rental rates for the period surveyed were 55 to 60 cents per square foot.
Williston is at the “epicenter” for growth from the Bakken, according to Elzi. The existing inventory of self-storage is about 241,000 square feet, with 99 percent occupancy. The market is underserved by 85,000 to 90,000 square feet and needs to add nearly 400,000 square feet over the next decade. Williston has pushed its rental rates to 72 to 75 cents per square foot.
“So, we see pent-up demand in Minot, Williston and Dickinson,” Elzi said.
Few projects in the pipeline
Despite that demand, little self-storage development is in the works. For the most part, existing owners have not pushed rents significantly higher, and that has made it tough to convince lenders to lend money based on rate forecasts, Elzi said.
One reason that rents have not risen significantly is that some longtime owners have been reluctant to institute rate hikes, said Bill Andrus, owner of All-Season Storage in Dickinson.
Facility owners like Andrus have increased rents slightly, but overall, rates remain well below those in other parts of the state, such as Bismarck and Fargo. For example, a 10×20 unit at All-Season Storage rents for about $75 a month. By comparison, the same unit in Bismarck probably would rent for $100 to $120 a month, he said.
Other hurdles to new construction are rising land costs and difficulties in securing building permits. All-Season Storage operates 215 units in eight buildings. The site can accommodate three more buildings, and Andrus has been trying for a year to get a building permit for an expansion.
Part of the problem is that too many projects went up too quickly, so now there are problems with water drainage and stormwater retention. “Until that is corrected, I think it is going to be awfully tough to get a building permit,” Andrus said.
The economic boom also is driving land prices higher. In the past few years, land prices in Dickinson have doubled from $2 to $4 per square foot. “That makes it very challenging to make the economics work for additional sites,” Messer said.
Like many local operators, BEE-Bay has focused on expansion of existing sites. In fact, Dickinson has seen a 40 percent jump in its self-storage inventory over the past few years, largely because of add-ons or expansions at existing facilities. In fact, BEE-Bay now is fully built out at the facilities it owns and manages, with 300 units at five facilities in Dickinson.
“Everybody is kind of in the same boat in terms of maxing out their density,” Messer said.
Outside investors take notice
The North Dakota market does enjoy plenty of upside, as there’s a shortage of modern climate-controlled facilities. Newer units have the potential to score double the current rents, but it’s been difficult to attract investment capital to make that happen, according to Elzi.
The same scenario existed years ago when people were forecasting that rental rates for North Dakota apartments were going to skyrocket. No one believed it. Williston now has the highest per-square-foot rents in the country. According to Apartment Guide, an apartment-finding website, a 700-square-foot, one-bedroom apartment in Williston can cost upwards of $2,000 a month — more than many apartments in New York or San Francisco.
Interest also expands beyond the oil boom towns to other major cities in the state, notably Fargo and Bismarck. Both Fargo and Bismarck made the list of America’s 10 fastest-growing economies — at fifth and sixth place, respectively — based on population and employment growth, according to a 2013 report by IHS Global Insight.
The big question for operators and investors is whether the demand in North Dakota is sustainable.
“As long as the oil economy continues to grow, I think the demand for all services is going to continue to grow,” Messer said. “But I think if that flattens out or in any way is restricted by things outside of our control, then that might flatten out demand and it could go the other direction.”