Self storage development is booming and a new facility is likely being constructed or planned within your market. You may have already noticed this by simply looking across the street from your own facility. In fact, some facilities are seeing multiple new projects go up within a few miles and most markets have already seen the new construction wave come to life over the past couple years. Is there too much new self storage development going on and what will be the impact?
In the country’s top 20 MSAs, there are over 1,100 new self storage facilities reported for construction as of January 2018, according to PAC-COMM, a national research and software company with a large focus in the self storage industry. That equates to a 3.5% overall increase in the number of facilities on average or over 55 new sites per market. While the top markets are leading the way, we are seeing a large oversaturation of self storage construction across the country.
What is the effect? With new development comes more options for consumers. Although demand for storage units has remained strong, in some markets it has not kept up with the increased supply. Many markets are not seeing the rent growth that owners previously enjoyed. As new facilities open, they will offer very large discounts to get their occupancy up quickly. This has caused existing facilities to drop their rates not only to keep their own tenants in place, but to also fill up any remaining vacancy they may have had. With decreased rental rates come decreased net operating income (NOI) levels. Where many owners saw increased NOIs over the past few years, many others have seen those level off and even decrease over the past year as new competition has entered the market. Of course, with lower NOIs come lower valuations. In summary, many markets across the country are reaching oversaturation and the effects are being seen and felt by owners. Many of them would agree that new self storage development should slow down.
Is your market becoming oversaturated and if so, what is your next step? To start, now is the time to understand what is currently happening with occupancy and rental rates. Next, compare these trends to what developments are under construction, planned or even proposed in your sub-market. From there, analyze what the impact may be on your facility in terms of NOI and valuations. Take advantage of all resources available to you and consult with an industry expert like a self storage broker who has a firm grasp on new development, occupancy and rental rate trends. Additionally, look at current exit prices and consider the pros and cons of holding long-term versus considering a sale today. Given the record high sale prices we have seen over the past three years (and are continuing to see), many owners have jumped at the opportunity to sell now and potentially re-enter the market at a more advantageous time during the next real estate cycle.
There is good news: we are finally seeing lenders and developers scale back on development efforts in some of the more saturated markets. Additionally, we are constantly finding several remaining under-supplied markets. There will obviously be winners and losers, but most of the new projects we are reviewing will succeed. Developers may not get the same rents they projected when initially planning the development and it may take longer to achieve a stabilization in occupancy, but ultimately many developers will still succeed without existing facilities seeing too much disruption to incomes and occupancies.
Furthermore, consumer demand is still growing. A large portion of the population is utilizing self storage for the first time and consumers are just starting to understand its functions. Self storage growth is no longer just a factor of job and population growth. Some owners estimate that about 50% of their customers are using the product for the first time. It is possible that we will see an increase in business from repeating customers over the next few years. Consumers are still learning to use the product and the frequency and diversity of self storage use will increase.
In my opinion, we are still in an overall great place in the industry. Fundamentals are sound and the product continues to rise to the mainstream. The customer base is changing and self storage owners have a major opportunity to set themselves apart from the competition. Stay up with new technology, continuously find ways to operate more efficiently and continue to grow. The majority of you are entrepreneurs at heart and that is what make self storage so unique!
About the Author
Nathan Coe is a self storage investment specialist with Marcus & Millichap and The Hatcher Group. The Hatcher Group is one of the country’s leading self storage brokerage teams and has achieved over $1 billion in sales.