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If You Build It, They Will Come

Written by: Brett Hatcher Posted: 11/10/2017
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Like Kevin Costner in Field of Dreams, many developers new to storage as well as seasoned are hoping for just that: If you build it, they will come.

The million dollar question is "When do we reach over supply?" My thoughts are that in some markets we have reached this point while others are in the process. There are not many, if any, markets in the US that are under supplied. I get five to six calls each week from people wanting to get into the self storage industry. When they actually look at purchasing an existing facility they quickly see they are priced out of the market by current valuation levels, or can not move as quickly as the larger, experienced players. This leads to more development, which in turn makes us see more deals that have us scratching our heads wondering “how is that going to be successful?”

Let us picture how this cycle plays out. Although I would love to think a real estate market like this will last forever, it will not. Do I think it will come to a screeching halt? No. I am not sure what shakes the economy and real estate markets - perhaps it will be interest rates going up (which will happen), tax reform, healthcare reform, continuingly growing national debt or possible foreign attacks.

What does all of this mean?

The market goes down at some point. In my opinion, we still have a good 18 - 24 month run in the current market. Given that, we may see a little decline because rates increase more next year. When things slow down, occupancy growth follows suit because people stop spending as fluidly. At that point, we will see new owners and old owners fighting for renters which means a few things: rents, income, net operating income and values all decrease. Depending on how far along the new developments are in the process, some of them will inevitably fail. While I do not see a flood of developments gone bad hitting the market at once, however I do think come 2019 - 2020 we will start to see a slow flow of short sales, not $0.50 on the dollar but perhaps $0.75 on the dollar.

In summation, my prediction is developers will continue to over build through the next 18 - 24 months. Most of those properties will have interest only for 12 - 30 months which will keep them afloat therefore they will not feel much change. However, as the market becomes saturated, owners will drop rates to attract renters (which is already happening). When you are considering development, be sure you are looking at the market rents and then discount them by 10% - 15% and understand that will be your “market rent” for the next two to three years. You need to be able to pay your debt on those rents. For those who have owned for a long time and have seen rates increase but hear about new development within three to five miles, be prepared to fight for rental rates over the next few years.

 

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