Houston, TX-based commercial real estate giant Hines Interests LP, known primarily for its office and mixed-use projects, is jumping into the self-storage business.

Hines already has three self-storage projects underway in the Phoenix, AZ, metro area — one each in suburban Gilbert, Litchfield Park and Tempe — and is considering projects in the Phoenix suburbs of Glendale, Scottsdale and Surprise.

Overall, Hines is eyeing construction of three to five facilities a year in high-growth, high-income suburbs in Arizona, Colorado and Texas, said Drew Steffen, managing director at Hines. Each facility will cost about $10 million to build, he said.

Hines is a global company operating in more than 200 cities in 24 countries. It has $111 billion in assets under management, according to its website. IPE Real Estate ranked Hines as the fifth largest manager of real estate assets worldwide.

Supply growth in Phoenix

Hines is among several self-storage developers trying to capitalize on the Phoenix market.

Hendersonville, TN-based STR Inc., a provider of data and analytics, said the Phoenix metro area is projected to see a 9 percent increase in supply over the next 12 months, with 22 projects now in the construction, expansion or final planning stage. As of April 2018, the Phoenix area ranked 17th for self-storage supply growth expected to happen in the next year, STR said.

So, why is Hines, which has $111 billion in assets under management, diving into the self-storage sector in the Phoenix area as well as in Colorado and Texas?

Aiming for Class A

Hines is breaking into the self-storage industry with its first project, Val Vista Self Storage in Gilbert, AZ.

“Hines strives to be the best real estate developer in all building types, and storage is an area which serves our existing clientele well, especially the significant single-family and for-rent multifamily customers we have throughout our markets,” Steffen told the SpareFoot Storage Beat. “We also see a lot of lower-class storage, but not well-placed Class A storage. We strive to fill this void with a better Hines-quality product.”

Groundbreaking for Hines’ facility in Gilbert is scheduled for mid-June 2018. The 75,000-square-foot facility, Val Vista Self Storage, will be built within a 20-acre mixed-use development. Malvern, PA-based self-storage REIT CubeSmart has been tapped to manage the facility.

W.E. O’Neil Construction Co. of Phoenix is the general contractor for the Gilbert project, and RKAA Architects Inc. of Phoenix is the architect. Construction is expected to be completed in early 2019.

Hines also is planning a 96,000-square-foot facility in Litchfield Park and an 83,000-square-foot facility in Tempe. Construction is set to begin this fall.

“A desired amenity”

Steffen said Hines will own the self-storage portfolio, but each facility will be managed by a third-party operator that’ll be chosen when each project is developed.

In a news release, Chris Anderson, managing director at Hines, said the timing is right for the company to diversify its portfolio by developing self-storage facilities, which he noted are evolving into “a desired amenity” and take less than a year to build.

“High-end self-storage projects are becoming a new trend as people live in smaller houses and need more storage,” Anderson said.

Is the Phoenix market “overbuilt”?

Veteran self-storage broker Bill Alter, managing director of Rein & Grossoehme in Scottsdale, AZ, cautioned that while that trend has helped elevate self-storage to the same stratosphere as asset categories like office and retail, Hines is entering the Phoenix market at a time when it’s “about to be very overbuilt.”

For example, Alter estimated there’s already about 10 square feet of self-storage per capita in roughly a three-mile trade area around where Hines is building the Gilbert facility. That doesn’t include an Extra Space Storage project that’s planned just outside that three-mile ring, he said.

At 10 square feet per capita, the territory surrounding Hines’ planned Gilbert site is saturated with storage, according to Alter. But although that represents an oversupply today, the trade area could accommodate 10 square feet per capita in a few years, he said.

STR said the Phoenix area has 467 self-storage with about 27 million net rentable square feet, or roughly 5.7 square feet per person.

Supply-and-demand tension

During their most recent calls with Wall Street analysts, executives at self-storage REITs Extra Space Storage Inc. and Life Storage Inc. cited supply pressures in the Phoenix market.

Given the current supply-and-demand dynamics in Phoenix and other self-storage markets, doing your homework before tackling a project is more critical than ever for developers like Hines, according to Alter.

“They’re a huge company,” he said of Hines, “so I’m sure they’re doing their homework. But you don’t want to be late to the party.”

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