Demand, Competition & New Supply
Self-storage contractors are holding the blueprints to an aggressive development cycle that is ushering in a brash new level of competition. With every new facility that comes off the drawing board, the industry appears to be evolving toward a position that further widens the gap between the most profitable operators and those destined to be less successful.
Some independent operators look at maps and scratch their heads trying to figure out why an experienced developer would drop a new store in the middle of an already competitive marketplace.
Old-school feasibility studies lie trampled in the dust of a construction site. The locations of some new developments don’t seem to make much sense, but there is an underlying fear that these facilities will become successful sooner rather than later, while older, nearby stores face decline.
This scenario is playing out in many metro areas around the U.S., as the current cycle of self-storage development accelerates with little indication it will slow down any time soon.
Union Realtime, a New York-based data and analytics firm, charted the opening of 835 new U.S. self-storage facilities in 2017, representing more than 45 million rentable square feet. Those numbers were more than double the 364 facilities opened in 2016, which contained approximately 20 million square feet.
This year’s growth appears to track ever upward. “We think it will be roughly 20 percent higher than in 2017, about 1,000 facilities,” says Cory Sylvester, a principal of Union Realtime.
What’s more, facility size is on the rise. Sylvester says new facilities opening in 2018 average approximately 60,000 square feet compared to 54,000 square feet for new openings last year. This could potentially bring 60 million square feet of new storage space to the U.S. this year.
Frenetic Building Pace
Construction contractors remain active, although this frenetic pace of new building may be leveling off.
In recent years, Texas-based SBS Construction had been increasing its business by a 25 percent clip year-over-year. Ted Culbreth, vice president of sales, reports that 2017’s volume turned out about the same as the previous year, and 2018 is on pace to match last year’s activity.
Caesar Wright, president of California-based Mako Steel, reports that in 2017 his company had its busiest year ever in 25 years of business, eclipsing 2016’s volume. Mako’s projects are concentrated in the Western U.S., with Denver; Phoenix; Portland, Ore.; and Seattle seeing the heaviest activity. “In Phoenix, we have six under construction there, and that’s just us,” Wright says. “There’s a lot in that market.”
He adds that most of Mako’s current projects are in urban infill areas near established communities.
Culbreth estimates 85 percent of SBS’s business is in Texas and Louisiana—principally in Houston, Dallas, Austin, San Antonio, New Orleans, and Baton Rouge.
SBS’s clients are locating their facilities in a variety of residential and commercial settings. “Some of them have business models that work better with new construction; some have business models that work better with multifamily; and some have business models that work better with commercial,” Culbreth says. “They’re going into areas they find the demographics meet their needs, and all of their demographics are different.”
While the SBS projects are strategically located, according to Culbreth, other facilities he’s seen under construction appear to be close to existing competitors. “There are a lot of people out there who are building closer to other people, but I don’t see that with our customers,” Culbreth attests.
The Danger Of Market Saturation
Self-storage development has been trending upward since 2014 and has become more virulent since then. As a result of this building boom, market oversaturation has been forecast in many metro areas around the country. In fact, declining occupancies and rental rates are now evident in some areas.
Union Realtime has identified several hard-hit areas, including Denver, Houston, Austin, Dallas, Chicago, and Atlanta, as well as Charlotte and Raleigh, N.C. Other areas that have experienced rapid storage growth may yet see these negative effects.
“Miami and Nashville are examples of areas where you’re going to see a big increase in the amount of deliveries and that will definitely continue to have impacts on their markets,” Sylvester says. “The Portland area is much more cause for concern. Portland has a lot of supply coming. Seattle as well.”
Phoenix has active development projects in the pipeline which have the potential of adding 21 percent to the metro area’s current supply. Despite this level of activity, Phoenix has not seen much of a decline in occupancy and prices, Sylvester says.
According to a recently published market summary, Union Realtime reports that Denver has 67 active development projects that potentially can add 28 percent in new supply. “Rental rates are under significant pressure and will likely decline over the next months,” Union Realtime says.
“You’re definitely seeing self-storage growth impact fundamentals,” Sylvester says, “especially in some local markets where development has been higher in terms of pricing declines and occupancy.
What has yet to be determined is how quickly this new supply will lease up in the years ahead. “We looked at some data from Extra Space, and their lease-up trends continue to be very strong,” Sylvester says. “Some of these areas are getting hit from a pricing and occupancy standpoint, but these new facilities are leasing up quickly. The question is whether these lease-up trends continue or slow down.”
If it takes two years for these facilities to lease up versus three years, it means newer facilities can work through supply faster and outrace potential problems. If lease-up times extend to three years, then the supply in 2017 will create problems in 2019 and 2020 in some markets.
To fill up new facilities faster, operators may be tempted to reduce street rates further and manufacture new concessions. This will undoubtedly impact neighboring storage facilities.
Steel May Temper Projects
One of the issues that could potentially temper rapid self-storage development is the rising price of building materials.
When President Trump slapped tariffs on imported steel and aluminum in March, domestic metal prices increased, creating uncertainty for self-storage projects in development. Increasing prices have had a dramatic effect on some facilities under construction, while others have seen minimal effects.
Steel and aluminum comprise approximately one-third of the overall makeup of a storage facility, and are key materials in roofs, roll-up doors, concrete rebar, window frames, duct work, and other building components.
Steel prices have been on the rise for the past five years, increasing an estimated 25 percent over that time. Just during the first four months of this year, Wright says his cost for steel has gone up 21 percent. However, he doesn’t anticipate any more price hikes during the summer.
“The challenge we’re experiencing is from inception to construction completion, it’s not uncommon for these projects to be 18 months,” Wright says. “The jobs we’re struggling with are contracts we engaged in September, October, and November. When we sign a contract, we don’t lock in steel. We can’t control this. For the first time in my career I’m going back to customers while under construction I’m asking for a price increase to cover my costs. I have a six-figure increase for one customer and they’re bummed out, but I can’t take that hit. We’re asking for customer participation.”
Culbreth estimates SBS has seen its projects go up in cost between two percent and 2.5 percent. “While that hasn’t killed any deals yet, it certainly is on our owners’ radar,” Culbreth says. “The bigger issue that seems to cause heartburn is very often we can’t tell them exactly what their project is going to cost in advance.”
In the past, he says a client could present a partial set of drawings and ask for a cost estimate for the project once the drawings and permitting process are complete, and he could provide a close ballpark price. But, given the escalating costs of steel, that estimate may resemble more of a strikeout than a homerun.
“Today, that’s out the window, because I could tell them what it costs today, but I don’t have any guarantee that in the timeframe that it’s going to take them to finish their drawings that those prices will be the same, because prices are fluctuating so quickly,” Culbreth notes.
The threat of tariffs is causing construction delays on some projects, further increasing owner costs.
Ultimately, investors and financial institutions may have to factor in rising materials and labor costs when proposed storage developments are presented to them in the future. This closer scrutiny could be the death knell for marginal projects.
The self-storage building boom is occurring within a climate where local authorities generally have made it much more difficult to develop facilities. Some municipalities have instituted zoning to prevent the proliferation of storage centers while others have placed conditions and restrictions on any kind of construction, adding delays and expense to planned projects.
California’s notorious high barriers to entry has helped to limit oversaturated pockets of self-storage in the Golden State. “Generally, it’s not going to have the same problems as the rest of the country, because zoning is much more difficult, Sylvester says.
Texas has a reputation for fewer restrictions, as evidenced by the rapid growth in the Lone Star State. However, Texas is not immune to new restrictions, especially in the wake of 2017’s Hurricane Harvey.
“In Texas and Louisiana, we’re dealing with some big changes coming to our flood zone areas because of Hurricane Harvey,” Culbreth says. “Flood mapping is changing pretty dramatically, so that’s something that will affect site selection.”
Most of the choice sites in urban Texas areas have been plucked for self-storage and other commercial uses, leaving developers scrambling for properties that meet their needs but may be more difficult to build on.
SBS is also dealing with more stringent demands to make buildings more energy efficient. “Insulation requirements are changing how we can construct the building and the materials we’re using,” Culbreth notes.
“As storage sites that are on easier-to-build properties become built, our owners have to pick up sites that are more difficult to build,” Culbreth says. “That could be the topography of a site making it more expensive, or soils making it more expensive, or requirements from a city, county, or municipality are more stringent, so we’re building on sites that are more difficult than sites we were building on two years ago.”
Some challenging sites rest on soils that are inadequate for building storage centers, so the contractor may have to excavate to take out existing material and bring in more suitable dirt from another location.
Municipalities have become much more selective about the appearance of buildings, going so far as to mandate the use of more glass and masonry while minimizing metal panels.
“None of these things are items that make the sites unbuildable,” Culbreth says. “They are items that make it more expensive to build on those sites.”
The lack of prime sites along with the rising cost of land has led more storage developers to construct multi-level facilities.
Mako is building a five-story facility in Washington on a small footprint of just over a half acre. The facility will have two subterranean floors and three above ground. Wright says many of the multi-story facilities feature several elevators and loading docks for customer convenience.
“Most things we’re building now that are multi-level have a sizeable loading bay,” Wright says. “I think that’s a newer trend because I don’t recall that five or six years ago. You lose a lot of rentable square feet with it, but it’s a good service to provide clients.”
He notes in desert regions with scorching summers and in the Pacific Northwest with excessive rain or snow, the loading docks provide comfort during inclement weather.
Restore, Rebuild, Replace
For aging properties sporting a few warts and located down the street from the latest Taj Mahal, there’s hope. Temple, Ga.-based Janus International calls it R3—Restore, Rebuild, Replace.
The Janus R3 Division is in its infancy, and its president, Troy Bix, has been spreading the gospel of renewal online, in publications, and in person.
Bix estimates there are approximately 30,000 aging facilities that typically have unsafe doors and are lacking security features. R3 seeks to revitalize older facilities through door upgrades, enhanced security, and additional products designed to improve income.
In addition to door replacement, R3 encompasses relocatable portable units; sophisticated door security and mobile access with the SecurGuard lock; one-touch security authentication, gate entry, and unit monitoring; and unit mix modification to maximize income.
Whenever a real estate investment trust (REIT) acquires existing facilities, one of their first actions is to upgrade the stores’ curb appeal and security to attract new customers.
“The REITs are creating facilities that are very secure, functional, and safe,” Bix says. “Unfortunately, a lot of independents are not following suit; therefore, their market relevance is diminishing.”
Janus is working to establish an R3 Certification program to reflect the level of upgrades a facility has achieved. “If you are R3 Certified, that means you’ve replaced every door on your facility,” Bix says. “R3 Certified means the safest, most secure, most functional doors in the industry. It’s a gateway for owners to raise rents through capital improvements of their site.”
Janus is also negotiating with insurance companies to grant premium discounts for R3 Certified facilities, since they have improved safety and security around the premises.
As market demographics shift to older clientele, aging facilities with out-of-date doors could pose injury risks to some tenants. Bix believes it’s just a matter of time until self-storage becomes the target for Americans with Disabilities Act (ADA) lawsuits.
“As self-storage customers get older, it’s going to become more of a fact in the self-storage world that the feds are going to come in and start enforcing ADA compliance,” Bix warns. “How do we find a way to keep folks from getting hurt and remain safe going to their units? You need to have functional doors and security systems, so why not get in front of ADA compliance and create a facility that’s safe, secure, and functional?”
Competition is becoming fiercer in self-storage as the industry expands its footprint from coast to coast and border to border. Faced with new competition and the prospects of declining occupancies and rents, owners of existing facilities will be forced to upgrade their properties and get more creative in their marketing in order to stay relevant in a maturing industry.
David Lucas is a freelance writer based in Phoenix, Arizona. He is a regular contributor to all of MiniCo’s publications.