by Jeffrey W. Adler, Yardi Systems, Inc.
Storage rent growth is decelerating but still trending up.
Rent growth for self-storage properties decelerated during the last several months as new supply and the maturing economic cycle weakened tailwinds which previously had been aiding the sector. As of February, year-over-year storage rents in the U.S. grew a modest one percent, which is in line with the decelerating annual growth rates we have observed since summer 2017.
Some of the new supply is intended to cater to the country’s growing millennial market as millennials’ favorite metros are getting lots of new supply. Much of the recent industry discussion has centered around heavy development deliveries, particularly in the metros which are popular with migrating millennials such as Austin, Charlotte, Denver, Nashville, Portland, and Raleigh-Durham. In contrast to average annual rent growth of one percent in the U.S., cities experiencing heavy new supply deliveries are simultaneously facing rent decreases of between three percent in Nashville and six percent in Charlotte and Portland. Much of the storage development in these cities has followed the surge in multifamily completions driven by young professionals moving from primary to secondary metros during the last few years as housing in the major coastal cities has grown more expensive.
While the millennial growth and long-term appeal of these metros is well-publicized, the boom in storage demand driven by retiring baby boomers is just now taking shape as a dynamic investment opportunity. The average baby boomer is now in his/her early 60s, which is usually the age around which retirees most commonly move from the family home where they raised their children to a warmer climate to enjoy retirement; for example, retiring executives from Westchester County, N.Y., are moving to Boca Raton, Fla. Retirees who move from one region to another tend to be affluent and have many possessions, so they make great storage customers compared to migrating millennials who have fewer household items and lower incomes.
As a result, storage rent growth in popular retirement destinations is dramatically outpacing the average U.S. market. As of February, year-over-rents have increased 10 percent in Las Vegas, seven percent in Phoenix, and five percent in Orlando. Rent growth for storage assets in these metros has been aided by the fact that new supply levels in Florida and the Desert Southwest total only about half of the development activity we see in popular millennial markets like Raleigh-Durham and Denver.
Given that the migration of baby boomers for retirement is in its early years, the storage industry is likely to have several more years of strong organic growth in these popular cities. In addition, regulatory changes such as the new tax legislation are likely to push more residents toward states with no income tax such as Florida and Nevada. Migrating baby boomers will also drive job growth in their new home cities as they demand services in healthcare and entertainment; this job growth will also encourage young workers to move to these cities, thus creating a positive feedback loop for real estate in the area.
Much of the economic press continues to focus on the desires of millennials, but it’s important to remember that there are also throngs of baby boomers moving every day to Florida and the Desert Southwest who are looking for storage space. This increasing demand from affluent migrants is likely to drive rents and development activity higher in these growing markets.