The past three years in the self storage sector have brought us a transformational development cycle marked by a technologically advanced vertical product located closer to the urban core. During the first three years of the cycle, which began in earnest in mid-2014 in the Texas cities, South Florida and the New York boroughs, developers were able to lock-up, entitle, permit and build Generation V (vertical) self storage with relative ease. The sites that were the “low hanging fruit” of the cycle were quickly gobbled up, providing the basis for dramatically higher actual and projected deliveries in the top 50 self storage markets in the 2017 through 2019 period.
While there continue to exist some sites that could be considered low hanging fruit, these sites have been passed over for a reason: they are probably not very good self storage sites. For example, many sites remain in industrial areas where self storage is a permitted use under the zoning ordinance and construction could begin immediately. The problem is the new self storage customer does not want to go to those neighborhoods and would rather store closer to where he or she lives, works and plays. Moreover, sites remain that would have been good sites for self storage development in 2015, but are now surrounded by new projects that would drastically impact a new site’s lease-up. At Jernigan Capital, we are most concerned about the unsophisticated or inexperienced self storage developer who builds the fourth GenV facility in a submarket that only needed three facilities. Those are the projects that could impact submarkets for the foreseeable future and we are seeking to discourage those projects every chance we get.
Despite the doom and gloom narrative above, there remain submarkets within the top 50 self storage markets that continue to suffer from a significant shortage of self storage supply relative to the demand in those trade areas. At Jernigan Capital we are encouraging our developers to seek sites in submarkets within major markets where population growth is significantly above national averages, barriers to entry exist to flush out the undercapitalized inexperienced developer, self storage square footage per person in the submarket remains below national averages and where there are not multiple new projects being delivered before or simultaneously. A site in a micro market with these dynamics might cost a lot more money, but a new GenV facility in such a market could lease up much faster and at much better rental rate than in the areas where the low hanging fruit remains. Such a site might take a couple of years to entitle and permit, but if the product of that effort is the last self storage facility in the immediate area, that wait can pay far greater returns. Patience, perseverance, good connections and the ability to pay a little bit more for land will produce home run self storage facilities that will be far easier to capitalize. These sites are the ones we are most excited about in our portfolio and the most interested in financing in the future. For more information about JCAP, please visit our website: JerniganCapital.com.