Is The Party Over?
Everyone in the business is familiar with the miracle comeback from the Great Recession. A large growth of self-storage facilities prior to the Great Recession led to a slow down and, in some cities, a complete halt to growth within the industry.
Occupancy in many instances dropped to between 70 and 80 percent, and facilities scrambled offering rent reductions and specials to attract new tenants.
While those numbers didn’t help owners, for many the downturn wasn’t dire and didn’t last forever. Those who stuck it out were well rewarded, a post-recession boom in demand for self-storage coupled with fewer new facilities coming on line has led to some of the best numbers in occupancy and rental rates the industry has ever experienced.
Now that more new facilities are coming on line and a new presidential administration promises more policies that are generally considered pro-business, is the party over for the industry?
Year Over Year Over Year Growth
Stephen Mirabito, president of StoragePRO Management Company, in Walnut Creek, Calif., has a prime example of how his company, as well as much of the industry, has fared since recovering from the Great Recession.
Mirabito states that his company consistently raised rental rates from five to seven percent in the early years of recovery, 2010 to 2013. However, in the last three years, the company has achieved no less than an annual year-over-year growth of 14 percent.
As well as record increases in rent, the industry has also experienced a growth in occupancy. While some recession figures dropped occupancy at some facilities to between 70 and 80 percent, occupancy for many facilities in a large number of markets are now sitting south of 90 percent. Some facilities have 100 percent occupancy with potential customers on waiting lists.
Ann Parham, CEO of Joshua Management, which is a member of the Parham Group in San Antonio, Texas, saw occupancy in Florida jump from 68 percent to 98 percent in just a matter of a couple of years. “It happened seemingly overnight, and it was because nothing else was coming on line,” says Parham.
Almost all levels of self-storage saw occupancy increased from the 80-plus percent range to 90 percent or above. According to Intra Realty Resources, Inc. (IRR), a market research firm that analyzes current trends, REITs reported a boost in square foot occupancy from 88.2 percent in 2011 to 93.4 percent in 2015.
The fact that the demand was outpacing supply allowed rents and occupancy rates to increase at record numbers, creating what some in the industry have called “the perfect storm” for a self-storage industry boom. IRR claims that revenue for self-storage hit $31.6 billion in 2015 and predicted $32.7 billion in 2016.
Will The Party Balloon Pop?
For many facilities, which have maintained 93 to 100 percent occupancy for much of the past few years, there isn’t anywhere to go but down. “Occupancy doesn’t have much more room to grow,” says Mirabito.
“When you have 90 percent occupancy, that really means that your most requested sizes are at 100 percent,” adds Arlen Nordhagen, chairman/CEO of National Storage Affiliated Trust in Greenwood Village, Colo.
With occupancy above 90 percent and higher, Nordhagen says that increases in revenue will have to come from rental increases. However, the new stores coming on line might influence both occupancy and rental increases.
According to Nordhagen, while there was limited new storage facilities coming on line in 2014, the pace picked up a little in 2015, but 2016 saw the biggest growth of new storage facilities since the end of the pre-recession boom in 2008.
“We saw an average of 2,000 new stores each year coming on line between 1998 and 2008,” says Nordhagen. “Depending on who is giving you the numbers, there were about 700 new stores in 2016.” Per industry estimates, that could rise to 1,000 new stores this year.
The areas with the newest stores being built include south Florida, Denver, Dallas, New York, and some of the other larger urban areas. Industry experts foresee a slowdown in the growth of rental rates and some see it as a result of more competition, especially in these markets. “We saw a softening of the rental rates already during the fourth quarter of 2016,” says Ben Vestal, president of Argus Self Storage Network in Denver, Colo., a company that operates 75 self-storage facilities in 35 markets west of the Mississippi. “Some of it could be attributed to seasonality, but a lot of it was due to the new supply in the market.”
As well, some of the new stores coming on line have rent specials for new customers and some are advertising that they will not increase the rent for as long as the customer stays. “Most customers only store for an average of 14 months, so it’s easy to figure out the marketing strategy,” says Mirabito. “I haven’t seen an industry analysis on how that may be affecting rents overall yet.”
Still, many industry experts agree that although the new facilities that came on line in 2016 and the ones expected to come on line in 2017 will provide some competition, that may not have too much of an effect on rents, due to the fact that many markets are still not over-developed.
Projections for more multifamily housing are still high nationally, with an emphasis in high density areas such as Miami, Houston, and Dallas, which leaves a lot more room for more self-storage facility projects. The Houston area, for example, has such a large square mile radius geographically, that it matters not how many storage facilities as much as where since studies show consumers want to be within around 3.5 miles of the facility.
Rental rate increases still might take a hit though. For some markets, the rent increases simply may have hit, or are close to hitting, their high point. “There is the fear that the consumer elasticity to rent increases will hit a trigger point when the consumer will no longer tolerate rental rates; we are very concerned about that,” says Mirabito. “We don’t know what that trigger point is, but we’re conscious of it. The consumer can only spend so much on storage before looking at alternative options.”
Parham agrees with that assessment. “People don’t have to store their stuff; they can get rid of it,” she says.
Mirabito’s company is handling this by instituting one large annual rental increase rather than a few smaller increases throughout the year. “I think the more seasoned consumer will be more open to one annual increase than several in that same timeframe,” says Mirabito.
Mirabito and others concede that the rents may have already topped to the maximum the market will bear in some places. “I think we will see rental rates flatten overall,” says Vestal. “I don’t think the industry will be able to maintain the rapid rate increases.
The Unknown Factor: The Economy
There is always the unknown factor of how well the economy will continue to grow, especially now that there is a new presidential administration in power. The new policies have been almost universally lauded as business friendly, with relaxed regulations and a tax bill reduction for small businesses. As well, the stock market recorded all-time highs at the first of the year.
“Texas has been booming and the economy is still very strong,” says Parham. Those sentiments are echoed throughout much of the country, but the economy might well be showing some early signs of cracks.
The stock market rally boom after the election began slowing after the inauguration and world markets became less enthusiastic about the new administration’s policies when it announced trade deals would be re-negotiated or abandoned. Some leading economists are proceeding with caution, still predicting another recession in the next two years.
“People only have so much disposable income,” says Parham. “If the economy begins to go south, people will start using that money for other things.” Parham recalls that many customers stayed for shorter periods and she lost half of her longtime customers during the last recession.
Watching gasoline prices and the economy overall is a smart thing for owners/operators to do. “We made it through the last recession in better shape than most industries; it’s still a great business, but we still have to be careful,” Parham notes.
The Bottom Line
While the party might not be over for the self-storage industry, it may be hitting that period late in the evening when people start to quiet down and slowly sip their drinks, determined to make the good times last.
New facilities coming on line and providing more competition, as well as the peak of rent and occupancy for many, will slow revenue. Vestal states that he is still anticipating a very respectable three to six percent revenue growth, but that is down from seven to 12 percent in recent years.
Nordhagen, who has been in the business for the past 25 years, states that this period is to be expected. “Typically, if we’ve had a really strong year, it will drop a little the following year,” says Nordhagen. “The only time I’ve seen it drop significantly would be if there was a recession that followed during the next year.” He mentions 2001, which was a very strong year in the industry; 2002, when the 9-11 terrorist attacks triggered a recession; and 2008 to 2009, the beginning of the Great Recession.
If there is another recession, it likely will not hit the industry as hard this time as the past few years did not experience the rapid growth that happened between 1998 and 2008.
Therefore, if companies continue to stay up on advances in technology and focus on the changes in customer preferences, such as providing products and services that appeal to millennials, things should remain strong. “I don’t think the party’s over,” says Mirabito. “There’s still business to be had.”
Kerri Fivecoat-Campbell is a freelance journalist based in the Ozark Mountains. She is a regular contributor to MiniCo’s publications. Her business articles have also appeared in Entrepreneur, Aol.com, MSN.com, and The Kansas City Star.