Since the last recession, the self-storage industry has experienced exceptional growth. Years of limited development, swelling populations, and continued job growth within major metropolitan areas produced a widespread shortage of self-storage capacity.
The lack of supply across the nation managed to propel the occupancies, rental rates, and NOI for existing self-storage facilities to record highs. Tight supply, low interest rates, and the considerable premium to replacement cost at which existing facilities are being sold has captured the attention of new and existing investors who are seeking to place massive amounts of capital into building new capacity.
According to Cory Sylvester, principal of New York City-based Union Realtime, LLC, a technology firm specializing in data, consulting, and analytic software for the self-storage sector, the real estate class is in the midst of “an unprecedented development cycle”.
“Look at census construction data,” Sylvester says, adding that, compared to any previous development cycle, “The current construction spending on new self-storage facilities is over doubled any prior peak over the last 25 years, and we believe that the census data underestimates the magnitude of building occurring. Developers are building at a rapid pace because the incentives make sense. There are broad implications from this.”
If self-storage development continues at this pace, it will be detrimental to the industry’s operating numbers. And, unfortunately, as Sylvester says, “We haven’t seen a slowdown yet. The incentives still make sense for a local developer who can built to a nine or 10 percent cap rate, with a market that is trading at six percent.”
Obviously, there has been a justified need to develop more self-storage facilities to cater to steadily-increasing demand and growing populations. However, the hasty influx of new development has begun to impact the industry.
For starters, lease-up times for new developments are lengthening. Sylvester notes that some of the newer self-storage developments are looking at an upward of three years to reach stabilization. Lease-up times over the last few years had shortened considerable, we are now seeing that reverse,” he says, which means that new supply will impact the market it is built in for a longer period of time.
What’s more, the numerous new developments have started to hinder occupancy rates at existing facilities. “Occupancies are dropping now,” says Sylvester. While some areas have been able to absorb the new supply without any noticeable recoil, that mostly applies to MSAs with extremely high barriers to entry.
Sylvester goes on to say that pricing began plummeting in larger cities prior to this year’s active. “Prior to Hurricane Harvey, spot pricing in Houston was down 20 to 40 percent on a year over year basis. While the extensive flooding and store closures are helping pricing rebound, other regions across the country continue to see deteriorating pricing conditions,” he says. “It’s not going to end any time soon.”
“Developers must consider this new world order before planning a new site,” Sylvester adds.
A Conservative Approach
Indeed, as the industry has unfortunately experienced during past development cycles, too much new self-storage supply can lead to problems. To mitigate further damage to the NOI of existing facilities and prevent planned properties from becoming financial failures, Sylvester advises self-storage developers to “be more conservative in their underwriting”.
Therefore, before proceeding with a project, developers need to truly understand the market’s supply, demand, trends, and fundamentals. “You need to be aware of your area and what’s going on around you,” he says, adding that monitoring self-storage data is a must to avoid overbuilding. “Developers should understand the occupancy, pricing, and lease-ups for the area—where they are now and where they will go.”
Developers must be thorough with their due diligence prior to making plans to develop new self-storage, and Union Realtime offers a web-based platform, www.unionrealtime.com/radius.html, that can help keep them in the know. The web-based platform is the first to map the existing supply base of the entire country, and it tracks all major aspects of the regional self-storage markets within the United States. It provides real-time data on pricing, demographics, new and existing supply, zoning, projects in the pipeline, and more. This data enables users to gauge the pulse of a specific site, market, or region.
In addition, Union Realtime has partnered with MiniCo Publishing to provide the detailed, market-specific data that will be utilized in this year’s edition of the annual Self-Storage Almanac, which has become a trusted tool for self-storage developers. Through this collaboration, the 2018 Self-Storage Almanac will map out where storage supply is across the country.
After completing your due diligence and reviewing your findings, Sylvester reminds developers that it’s best to err on the side of caution before making a decision to build. Taking a gamble when millions of dollars are at stake is unwise and foolhardy. Any uncertainties you have about a market should be further investigated to enable you to make an educated decision. When it comes to developing self-storage, facts should outweigh gut instincts.
The importance of market-specific self-storage data is clear: It enables developers to make better building decisions, while enabling operators to obtain a better return on their assets. Nevertheless, there is always room for improvement. For this reason, Sylvester urges owners and operators within the self-storage industry to assist with Union Realtime’s effort to compile up-to-date information by inputting data about their markets and facilities.
“Users on our platform can report any activity they know of in their area directly into the platform, which results in real-time transparency,” he says, as Union Realtime instantaneously incorporates the information reported on its site into its data. “Sharing information leads to more informed decisions by all market participants. We don’t want overbuilding.”
Self-storage professionals can input details about new developments in their markets such as the project’s address, number of units, square footage, and developer, as well as any other known specifics.
The reported data is then collected and checked for accuracy. “We have a process in place to verify the developments,” he says. “We can check for inaccurate data.” While projects in the planning phase are more difficult to confirm, as plans do change, the company looks into anything that is reported.
In addition, Union Realtime has started collecting data from self-storage owners and operators who want to share their data and receive data from other operators. “We’re facilitating that exchange,” says Sylvester. This tit-for-tat dissemination of information can be extremely beneficial for self-storage operators who’d like to either expand their portfolios or improve their portfolio’s performance. “If you know that your competition doesn’t have any units available, you’re going to price your available units more intelligently,” he says. “This is at the core of why owners and operators should participate.”
In This Together!
The overall message is that, as an industry, all of us are in this together. What one developer does will impact the entire market. What’s more, it’s basic business 101: Excess product erodes profits. Therefore, please take the time and energy to take an in-depth look at every single market you plan to enter. The future health of our industry depends upon it.
Erica Shatzer is the editor of Mini-Storage Messenger, Self-Storage Now!, and Self-Storage Canada.