Over the last 15 years, the self-storage industry evolved from a mom-and-pop investment class to a mainstream institutional asset class. Heading into 2018, I want to highlight some industry trends that will continue throughout the year and help the industry’s continued growth:
- Self-Storage Technology – It has really grabbed hold over the last several years. The use of online SEO, web-based operating systems, e-Leases, mobile apps, kiosks, fully automated stores, energy efficient operating devices, and website and marketing firms will continue to allow owners and operators to refine their operations and grow their profitability by protecting the already strong operating margins that the self-storage business enjoys. All the above listed items, and many more, will allow operators to increase profitability either through operating expense reduction, increased revenues, or produce data that will allow operators the ability to create operating efficiencies and achieve greater market valuation.
Supply – It’s being tracked by Argus in over 50 markets nationwide, and
2017 to 2018 will see the delivery of meaningful new supply in almost every
major market. This will undoubtedly influence the submarket fundamentals where
these new properties are being developed. It is no surprise that the markets
seeing the largest amount of new development are the ones that have enjoyed
tremendous population and job growth over the last two to four years. Markets
such as Dallas, Denver, Austin, Portland, Atlanta, San Jose, Tampa, and Orlando
are all seeing a tremendous amount of new product being developed. In general,
lease-ups of new properties appear to be in line with the traditional two to
four years’ pace, but rental rates seem to be slipping, and we are seeing new
properties having to offer larger than expected discounts to maintain their
lease-up pace. Obviously, there is always an exception to the market; if you
are one of the lucky developers achieving a faster than expected lease-up and
at or above your proforma rental rates, the grass has never looked greener.
- Third-Party Management – These companies continue to improve and create value for their clients. Professional third-party management has paved the way by pushing revenues and standardizing and refining the process of operating a self-storage property, allowing the industry to lead all real estate sectors in performance over the last 10 years. These management techniques, processes, and capabilities have now trickled down to privately owned midsized third-party management companies specializing in self-storage. These companies are able to provide a very professional and economical product to markets and properties that haven’t had access to third-party management platforms in the past. This has opened up several new smaller, yet still very dynamic, markets for buyers. I believe that the third-party management business will continue to grow and add tremendous value to owners and the industry.
The outlook for the self-storage sector in 2018 remains cautiously optimistic. As the U.S. economy continues to accelerate slightly and new self-storage supply continues to come online, the self-storage sector should hold strong. There will undoubtedly be pockets of slow down, but overall the self-storage market should grow modestly in 2018. While we don’t know how long this current peak in self-storage valuations will last, we do know that the owners who take proactive measures to keep their properties competitive will be in the best position to capitalize on opportunities that may arise or protect against a potential downturn.