Demand for self storage space has been robust throughout the current growth cycle and last year’s absorption set the strongest pace in five years. Positive economic momentum, including accelerated job creation, elevated confidence levels and heightened household formation, supported the self storage sector. The strong demand was, however, set by record development levels that placed upward pressure on vacancy rates in several markets.
The millennial generation continues to play a key role in sustaining self storage demand. Lifestyle choices, including their preferences for renting, flexibility, mobility and smaller living spaces, favor the use of self storage space. For millennials, self storage has become more than just a place to store infrequently used belongings, it has become an extension of their closet space. Young adults frequently store active-lifestyle equipment such as bicycles and camping gear in their facility and about a third of these renters access their storage unit at least once per week. As facility operators adapt their properties and services to this new generation of customers, demand could continue to rise.
Though completions set an all-time high in 2018, the wave has begun to recede. Tighter lending has joined the impact of rising building and labor costs to restrain self storage construction in 2019. It is also worth noting that construction has generally been quite concentrated, with just five metros receiving 25 percent of the supply over the last three years. Though new competition and properties in lease-up could create short-term challenges on a localized basis, several major metropolitan areas still face a shortage of self storage space.
The sales climate remains active, elevated and stable, with generally steady cap rates. Interest rate volatility could alternately benefit and detract from the sector this year, but market liquidity remains strong. Undoubtedly, new challenges will emerge, but most forward-looking metrics still point to additional runway for self storage investments in 2019. As you recalibrate your investment strategies in this dynamic climate, our investment professionals stand ready to help you evaluate your options and implement your strategies.