Why Storage Might Be Sexy for Office Owners
The DC region has 38M SF of obsolete office space, according to NGKF, and one landlord is pioneering an option for a new use: a conversion to self-storage.
Washington Property Co's 4 Research Place is an 83k SF, three-story office building along I-270 in Rockville. Lockheed Martin moved out a few years ago, and the building's location in an office park—away from transit—has made re-leasing it to an office tenant a non-starter.
NGKF director of research Greg Leisch (whom we snapped at his BenchMarks event last month) tells Bisnow self-storage is the optimal use if a landowner wants to maximize the bottom line. "They're cash cows, it's incredible," he says.
Few people know the area's industry better than Greg, who founded Delta Associates. WPC's Rockville conversion is the first in the area; he says it likely won't be the last.
"I would not be surprised if we see others," Greg says. "It’s going to remain a small component [of the activity]. But it will be a component."
Greg and his team recently produced a white paper on what to do with the 600M to 1B SF of obsolete suburban office space in the country. Conversions of all types—to hotel, to multifamily and to storage — are going to become more common as leases expire and landlords have to work with unattractive space.
The whole storage sector has caught fire this year. In Q2, revenues among self-storage REITs increased 5.8% to 9.4% year-over-year, according to an MJPartners report. Net operating income surged from 7.8% to 12.1%. MJPartners also found that newly developed facilities were leasing up faster than expected.
Green Street Advisors analyst Ryan Burke says self-storage is a nearly recession-proof asset class, making it even more attractive for institutional investors looking for consistent, steady revenue.
Greg says there are likely between 12 and 20 properties that could fit the bill for this type of conversion in the region. The property would need to have "a hinterland of residential" around it, Greg says, the absence of competitors, not many floors and enough surface parking to expand to around 100k SF, the sweet spot for these facilities. Even then, it's not that simple.
Washington Property associate VP Janel Kausner tells us self-storage conversions have received a little resistance from some of the surrounding communities. "It’s an interesting combination of trying to find the right underperforming product that’s already zoned with some sort of warehousing/industrial use that’s by right."
4 Research Place checks that box, and WPC is already planning another 85k SF storage facility in the current parking lot for Phase 2.
"You go from historically what has been thought of as the pinnacle use, office, to the stuff that looks crappy that is kind of the bottom of the heap," Greg says. "A lot of that image of self-storage is dead wrong. The value created by self-storage is immense."