In many respects, 2016 was another banner year for the self-storage industry. Transaction velocity remained robust as property values continued to reach new heights. New projects opened for business at a pace not previously seen in my 10-year career, built bigger and more elaborate than ever. With the wind at our backs for this lengthy time, many are wondering just how long this great run is going to last and what the future holds when it inevitably comes to an end.
While it’s hard to predict the ebbs and flows of any real estate cycle, the end of 2016 felt a little different than previous years. The presidential election certainly played a role, but other factors influenced the market too. Revenue growth in mid-year 2016 started slowing down for a lot of operators, from a robust eight to 10 percent to a more normalized three to five percent in a number of major MSAs around the country. Looking back, this “slow down” was the first indication that a shift in the market could be taking shape. It certainly didn’t go unnoticed by operators, as moving the bottom line double digits was almost automatic in years prior. We began to feel the effect on some of our transactions in the third and fourth quarter as underwriting became more scrutinized, the local trade areas more thoroughly dissected, and the physical conditions of our assets more closely inspected and challenged.
Perhaps the biggest effect could be seen on our more speculative deals, with transactions involving some form of lease-up from certificate of occupancy offerings to new expansion evaluations. While these deals are still trading at generous profits to developers, we began to see fewer offers to purchase than in prior quarters. We’ve noticed investors becoming slightly more conservative in regards to current market rates and rental growth projections. This effect was magnified on facilities in second- and third-ring suburbs more susceptible to new competition as investors began pricing in more risk.
Looking forward to 2017, we expect transaction velocity to remain elevated as sellers continue to take advantage of favorable conditions. We anticipate the gap between buyer and seller pricing expectations on existing facilities to widen, but at a manageable pace. New square footage will be delivered in record numbers, triggering more certificate of occupancy deals to hit the market that ever before. However, the probability of execution on many of these transactions may be diminished due to complexity and the misunderstanding of current market value. Should interest rates continue to increase, and as rental growth slows, the urgency to “catch the top” will influence owners on the verge of selling to take a hard look at finally pulling the trigger. We’ll all be watching what happens in 2017, but change, no matter how big or small, always creates new opportunity for those who are savvy enough to see it. Good luck out there; it should be another exciting year for the industry.