The demand and supply curve for self-storage properties will separate further in 2014, with more than a million new households created in the U.S., but only half the number of storage units planned for completion this year compared to 2013.
Last year, developers in the self-storage sector had a surge of activity, delivering about three million sq. ft. of space to the market. This year, however, they will add only 1.7 million sq. ft., totaling 21 new self-storage facilities, according to a first quarter report from real estate services firm Marcus & Millichap. Adam Schlosser, associate director of the Marcus & Millichap national self-storage group, says demand grows stronger every day, but there are impediments to new construction.
“We’re seeing double-digit increases in revenue and occupancy across the country, and developers are hitting near 100 percent occupancy in less than two years after open where it used to take three years,” Schlosser says. “Even though this industry weathered the downturn better than any other product type, there’s still some hesitancy by lenders to finance new buildings. Partly it’s because they don’t understand this niche product type.”
There are multiple selling points today for self-storage, Schlosser notes. The employment market has improved, with people moving all over the country for new jobs. Marcus & Millichap predicts new households will increase to 1.25 million in 2014.
“In self-storage, we gauge that about 9 percent of households per year are renting or will rent a storage unit. That’s about 112,500 new units needed,” Schlosser says. “With that much demand and little supply, you’re looking at an unbalanced curve that will likely continue [for] the next few years.”
In the works
The pipeline of new development includes only 221 properties, about 5 percent of the total inventory, according to a recent report by self-storage experts MJ Partners. The Chicago-based firm said in its report that occupancy among self-storage REIT portfolios ranges from 89.2 percent to 93 percent, with the REITs’ net operating incomes averaging between 8.2 percent and 10 percent in 2013. However, the report also referenced the difficulty in obtaining construction financing, with lenders requiring more equity capital to fund and carry out projects through stabilization.
Both MJ Partners and Marcus & Millichap researchers agree that the industry should be at an apex of growth due to demand and technology improvements. The top self-storage firms, including the REITs, have invested heavily in new technology that streamlines unit management, allows for more accurate rent increases and encourages customers to open online accounts. The MJ Partners report quotes Spencer Kirk, CEO of Extra Space Storage: “New customers are quickly migrating toward mobile devices, used in 25 percent of our rentals last year and may be 50 percent in 2014.”
Transactions are slow because there’s so much competition for limited property in the self-storage market. Tight cap rates are one hurdle for sales growth. In primary markets, cap rates on self-storage buildings have tightened to the sub-6 percent range, according to the Marcus & Millichap report. Investors are nervous about rising interest rates, anticipating they may put upward pressure on first-year returns.
Instead, the industry has seen an increase in mergers and acquisitions, Schlosser says. Recent mega-deals include CubeSmart’s $326 million purchase of a Private Mini Storage Inc. portfolio of 36 properties, in a partnership with Heitman LLC, with most of the sites located in Texas. In December, Stor-All completed the sale of its remaining 44-property self-storage portfolio to Public Storage for $430 million. The Glendale, Calif.-based Public Storage was on a buying spree in late 2013, purchasing 43 facilities from Harrison Street Real Estate Capital LLC for $315 million and another 29 properties for $371 million.
“The REITs in particular are flowing massive amounts of capital into self-storage. They’re well-capitalized and with new technology can afford aggressive purchase numbers, they know they can increase their revenue stream with acquisitions,” Schlosser says. “We’ve seen more large deals in the past two years than in the past 10 years.”
This article was republished with permission from National Real Estate Investor.