Hindered Performance: The Continuing Impact Of Elevated Development

Self-storage has been a booming asset class within the commercial real estate industry in recent years. Driven by migration of an increasingly mobile population, continued urbanization, and smaller living spaces, new development in the self-storage sector has dictated market conditions and industry discussions. While 2019 saw nearly 60 million square feet of new self-storage inventory delivered across the nation, it was still a slight drop from 2018 which saw the peak amount of completions this cycle. Only minor reductions in development are anticipated in 2020, 2021, and 2022; as a result, the continued elevated levels of new supply will likely continue to put pressure on operators to reduce rates across unit types and hinder rent growth nationwide.

Since 2016, new self-storage development has been delivered in different intervals unevenly across the nation. Initially, developers primarily embraced secondary tech markets showing strong migratory trends, such as Houston, Austin, and Charleston, to the point these markets became oversaturated, forcing operators to make deep rate cuts. As development focus shifted, the once overtly promising Florida markets, such as Tampa and Miami, have started feeling the effects of elevated new supply, and operators in these markets have started to slowly reduce rates to maintain a balanced supply-demand dynamic.
As secondary markets are starting to feel the full effects of oversupply, gateway markets have slowly started taking some of their spotlight as opportunistic markets. Despite gateway markets, such as New York and Los Angeles, having stagnant demographic growth, and domestic outmigration, their low levels of self-storage penetration have not caused major rate compressions, as oversupplied secondary markets have experienced.

Development Pressure In Florida
Florida markets continue to benefit from strong population growth alongside robust employment gains, but the key metropolitan areas in the state—Jacksonville, Miami, Orlando, and Tampa—are starting to potentially face absorption risk due to recent delivery of new supply and a significant development pipeline that could result in oversaturation. Operators have already taken measures to combat the new supply by dropping rates in these Florida markets, and have started to look towards the tertiary markets within the state, such as Tallahassee, for new development.

Across these four Florida metros, street rates for non-climate-controlled 10-by-10 units have declined an average of 3.4 percent and climate-controlled 10-by-10s decreased by an average of 5.2 percent from the fourth quarter of 2016 to the fourth quarter of 2019. Since 2016, the four major Florida markets have delivered more than 15 million square feet of self-storage stock. Currently, these four markets show an additional 3.7 million square feet under construction, all of which is estimated to be completed throughout 2020. Underpinning this continued development surge has been the influx of population due to both domestic and international migration. Between 2010 and 2018, a combined net of 1.3 million people migrated to these four Florida markets. Despite losing more than 120,000 people from their population to domestic migration during this same period, international migration of nearly 600,000 people into the Miami metro puts it at the top of the four markets, with a net of more than 470,000 people moving to the metro. Storage developers have been taking advantage of the substantial inflow of movers to these four markets and, as a result, total self-storage supply has increased just under 17 percent since the beginning of 2017.

Operators in these markets are now facing the possibility of oversupply, especially if migration patterns falter, job growth declines, or the housing market deteriorates. Yet, according to data from the University of Florida’s Bureau of Economic and Business Research (BEBR), Florida’s population is projected to increase to over 24 million by 2030. This projection means that the state of Florida’s population will grow by 17 percent, making high-population areas even more densely populated in the future, thus creating storage demand. Drawn by the region’s favorable tax environment, companies continue to relocate and expand in the state, which is also bolstering economic growth. Operators will likely see some additional opportunities in Florida, mainly in smaller tertiary markets and less penetrated secondary markets. This is despite average street rents across all 10 markets tracked by Yardi Matrix in the state of Florida for non-climate-controlled 10-by-10s decreasing 7.8 percent and climate-controlled 10-by-10s decreasing 4.6 percent from fourth quarter 2016 to fourth quarter 2019.

Of the four major Florida markets (Orlando, Tampa, Miami, and Jacksonville), Miami is the only market that falls below the national average of 6.5 net rentable square feet (NRSF) per capita with 5.9. Orlando with 8.7 NRSF per capita and Jacksonville with 8.1 NRSF per capita are at the greatest risk for oversupply and long-term absorption concerns, particularly if demographic growth in these markets subsides.

Orlando is the only market that has seen positive rate growth over the last three years compared to the other three Florida markets, despite it having the highest net rentable square footage (NRSF) per capita with 8.7. From the fourth quarter of 2016 to the fourth quarter of 2019, Orlando saw a 1.0 percent increase in street rates for non-climate-controlled 10-by-10 units, and a 1.6 percent increase for climate-controlled 10-by-10s. Compared to Tampa, Miami, and Jacksonville, Orlando also has the largest pipeline of under construction and planned developments, currently constituting 11.9 percent of existing stock. Orlando’s storage fundamentals have benefited from strong demographics, but due to the amount of new supply anticipated for future delivery, there is potential for long-term absorption risk and over-penetration, especially if population and economic growth falters.

However, Orlando continues to show signs of a thriving economy and saw a 3.4 percent growth in employment in the 12 months ending in October 2019. The Wall Street Journal reports that the Orlando area is adding jobs and attracting workers at the best rate in the country. Comcast, parent company of Universal Studios Resort, announced in August of 2019 that it will be building a major expansion in Orlando, to be known as “Universal’s Epic Universe.” This will be the fourth Universal theme park in Florida and will create an additional 14,000 jobs for the local area. As the tailwinds of economic growth and domestic migration continue, the Orlando self-storage market may be able to thwart some of the negative effects of elevated levels of future new supply, however it will likely be a tough slog for operators.

Of the four Sunshine State markets, Tampa has fared the worst in terms of street rate growth for non-climate-controlled 10-by-10 units over the last three years, falling 7.9 percent, while rates dropped 6.4 percent for climate-controlled units from the fourth quarter of 2016 to the fourth quarter of 2019. During this same three-year period, Tampa had the nation’s sixth largest amount of storage completions: 57 properties for more than 4.7 million square feet of new supply deliveries. However, out of these four Florida markets, Tampa now has the smallest development pipeline as a percentage of existing inventory with 8.9 percent.
From 2010 to 2018, Tampa saw their population increase by 12.9 percent; over 240,000 of which were domestic migrants moving to the area. The Tampa metro has an unemployment rate of 2.9 percent and shows signs of continued prosperity due to its emergence as a destination for tech companies. In September 2019, 20,000 of the 60,000 job openings in Tampa were for high-skilled, high-wage STEM positions. With a NRSF per capita of 7.9, not considerably greater than the national average of 6.5, Tampa’s above trend population and employment gains may be able to create more balance in terms of supply and demand, helping improve rate conditions.

Miami experienced the second largest decline in street rates amongst these Florida markets for non-climate-controlled units and the third greatest decline in rates for climate-controlled 10-by-10 units. From the fourth quarter of 2016 to the fourth quarter of 2019, Miami rates decreased 5.8 percent for non-climate-controlled units and experienced a 5.0 percent decrease for climate-controlled units. Yet, Miami posts the highest street rates of the Florida metros, with an asking rate of $152 for climate-controlled 10-by-10s and $131 for non-climate-controlled 10-by-10s. The Miami metropolitan area, which includes Fort Lauderdale and West Palm Beach, has a considerable development pipeline of 13.6 percent of its existing self-storage inventory. However, with the lowest NRSF per capita of all four large Florida markets of only 5.9, the outlook for Miami is still fair. The market may face some absorption risk in the short term, but if its demographic strength continues it should be able to handle the new supply that will be delivered with minimal rate impact.

As a port-of-entry region, Miami has mainly benefited from substantial international immigration that has negated its domestic migration losses. Due to its diverse economy and business-friendly environment, Miami is projected to experience continued growth, as is suggested by the large upward trend in the number of apartments being built in the city. Any boost in migration or economic growth due to increased housing supply will likely help boost the demand for new storage inventory.

Over the last three years, Jacksonville experienced the largest rate growth decline for climate-controlled 10-by-10 units compared to Orlando, Tampa, and Miami. From the fourth quarter of 2016 to the fourth quarter of 2019, Jacksonville saw street rates for climate-controlled 10-by-10s fall 11.0 percent, and rates for non-climate-controlled 10-by-10s fall only slightly by 1.1 percent. On the other hand, Jacksonville experienced a year-over-year increase of growth, from December 2018 to December 2019, in street rates for non-climate-controlled 10-by-10 units of 4.5 percent, which is a difference of 10.8 percent compared to its rate performance from 2017 to 2018 of -6.3 percent. Of the four largest Florida markets, Jacksonville has the second highest NRSF per capita at 8.1. Yet, the metro has a robust pipeline with under construction and planned developments currently totaling 9.5 percent of existing inventory, possibly bolstered by local construction costs which are 15 percent lower than the U.S. average.

Compared to Orlando, Tampa, and Miami, Jacksonville experienced the lowest population increase from 2010 to 2018 with 11.2 percent; but this rate of growth is still nearly twice as fast as the national rate during this same period of 6.0 percent. Home to three Fortune 500, five Fortune 1000, and 80 national or divisional headquarters, Jacksonville also has sustained steady job gains and saw employment growth of 3.2 percent for the 12 months ending in October 2019. As Jacksonville is further penetrated in the coming years by new supply, it runs a risk of over-penetration and long-term absorption issues, especially if population and migration growth do not keep up with the new supply that will be delivered.

Undersupplied Gateway Markets Begin Building
Primary gateway markets such as New York, Boston, Los Angeles, and Washington, D.C., have historically had a lower penetration of self-storage. However, as secondary markets become over-penetrated, operators continue to search for investment opportunities. Seeking markets with strong population density and limited existing self-storage supply, operators are recognizing the potential in gateway markets, as is evident by the robust development pipelines in these markets.

Unlike flourishing secondary markets, such as Orlando, these primary markets are experiencing little to no growth from domestic migration. From 2010 to 2018, New York, Boston, Los Angeles, and Washington, D.C., all saw negative total domestic migration, with the Big Apple seeing the nation’s largest outmigration of 1.2 million people moving out of the metropolitan area. Despite their lack of migration, the large existing populations and urban density in these older primary markets still generate considerable storage demand. Strict local regulations and limited land availability have been barriers for new supply in these markets and, due to their large populations, these four gateway markets have an average net rentable square footage (NRSF) per capita of 4.2, which is substantially lower than the national average of 6.5 NRSF per capita.

Operators have ultimately been capitalizing on the demand for urban storage in these four major gateway markets, causing a significant uptick of the amount of new supply in the development pipelines over the last couple years. In 2019, New York, Boston, Los Angeles, and Washington, D.C., saw a combined total of 85 construction starts throughout the year—more than quadruple the 20 total starts witnessed in 2018. Currently, Los Angeles is the only market out of these four that has a development pipeline as a percentage of existing inventory less than 12 percent.

This accelerated growth of new supply delivering over the next few years means operators will face plenty of new competition in these markets and may be forced to cut rates to remain competitive, especially as they struggle to find a balance of storage supply and demand given the stagnant and slow growth of older gateway markets.

New York
Despite losing over a million residents to domestic migration out of the city from 2010 to 2018, New York still claims the title of having the largest population of all the metropolitan areas in the United States. New York’s large population and historically low penetration of self-storage results in the nation’s lowest net rentable square footage (NRSF) per capita of 3.3, underpinning why the metro continues to experience steady rate performance while many secondary markets with greater growth are seeing substantial rate declines due to oversupply. New York has performed moderately well in terms of street rate performance over the last three years, experiencing a 4.3 percent rate increase for non-climate controlled 10-by-10 units and a marginal drop of 0.5 percent for climate-controlled 10-by-10 units.

Storage developers are starting to notice the opportunity in the New York market, and the metropolitan area now has a robust new supply pipeline as a result. The metro area currently has a development pipeline of 60 under construction and 94 planned projects that equate to 16.2 percent of the existing self-storage stock. New York’s storage development is focused within pockets, supporting the notion that self-storage tends to be micro-oriented dependent on demand generators within the immediate area. Within the New York metro, four of its regions have development pipelines as a percentage of existing inventory at or above 20 percent, including Staten Island, Long Island, Queens, and Brooklyn. Notably, Staten Island has the nation’s largest development pipeline, with under construction and planned projects as a percentage of existing stock of 66.9 percent, which may be attributed to it being the only borough in the city to see population growth from 2017 to 2018.

With such a large development pipeline underway, the New York metro may face short-term absorption risk, especially due to its relatively stagnant population growth and negative domestic migration. However, with a NRSF per capita of only 3.3, the overall New York market is still well below the national average of 6.5 NRSF per capita, allowing it some leeway to handle the large amount of new supply coming on line without severe adverse effects to street rates that have already seen negative decline.

Los Angeles
The county of Los Angeles saw population fall last year, ranking fourth in terms of the nation’s most populous counties losing people in 2018. This contraction comes as the area struggles with housing affordability and a lack of new housing development. Yet, Los Angeles has fared the best in terms of rate growth with non-climate-controlled and climate-controlled 10-by-10s, gaining 8.2 percent and 9.9 percent of their street rate value, respectively, since the fourth quarter of 2016. Los Angeles’ positive rate performance, despite declining population, suggests that due to high housing costs people may be opting to rent storage space in order to fit in smaller and less expensive living spaces as an alternative solution to moving out of the metro area.

Los Angeles has a moderate development pipeline as a percentage of existing stock of 8.0 percent, and its amount of existing self-storage stock equates to 4.8 net rentable square feet (NRSF) per capita. The market appears to still have development opportunities and the capacity to absorb new supply, but they may be rare as outmigration may create inconsistent demand.

Washington, D.C.
Street rates in the Washington, D.C., market, which includes Northern Virginia, have remained stable over the last three years, with non-climate-controlled 10-by-10s declining faintly by 0.7 percent and rates for climate-controlled 10-by-10s declining only slightly more by 1.3 percent. During these same 36 months, Washington, D.C., saw more than 5.4 million square feet of new self-storage supply delivered, but strong population growth coupled with economic expansion has created enough demand in the metro to negate the long-term absorption risk of the large uptick in inventory. Washington, D.C., does have a strong development pipeline as a percentage of existing inventory of 12.3 percent, but with Amazon’s HQ2 underway just across the Potomac that is expected to create 25,000 jobs over the next decade, the Washington, D.C., area should see an increase of population and economic growth, creating storage demand in the long term and counteracting any short-term absorption risk from new supply anticipated to be delivered.

Regardless of its demographic and economic growth, Boston has experienced the largest decline in rates compared to New York, Los Angeles, and Washington, D.C. From the fourth quarter of 2016 to the fourth quarter of 2019, the market saw rates for non-climate-controlled 10-by-10s fall 6.1 percent and rates for climate-controlled 10-by-10s decrease by 3.0 percent. During this same 36-month period, Boston experienced deliveries of more than 3.4 million square feet of new supply, resulting in a current net rentable square footage (NRSF) per capita of 4.4. Boston’s NRSF per capita of 4.4 is still well below the national average, but with a development pipeline of 12.6 percent of existing inventory, Boston’s NRSF per capita will likely rise, especially in the short term until the market’s gradual demographic growth catches up. From 2010 to 2018, Boston did experience population growth of 7.1 percent and a 1.5 percent growth in employment for the 12 months ending in October 2019. This population and economic growth, albeit slower than many of the booming secondary markets, may be able to stave off negative effects of the new supply and developers may still see opportunity into the future.

Self-storage operators are feeling the effects of new supply across the nation and will likely continue to over the next few years. Migration and economic growth have underpinned storage development in key Florida markets, but high levels of new supply have begun to put downward pressure on street rates, creating initial signs of oversupply in these markets. Gateway markets, despite under penetration and steady rate performance, could potentially face absorption risks as outmigration and stagnant growth create inconsistent demand. As supply overwhelms most major markets, developers will likely focus on secondary and tertiary markets that they would have previously overlooked for viable opportunities. As a hyper-localized industry, storage opportunities are dependent on demand generators in the immediate area, so smaller secondary and tertiary markets may have overlooked potential. However, vast amounts of new supply have caused the self-storage industry to fall out of balance and will likely hinder rent growth across the nation for the foreseeable future.


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