Despite a contraction in self-storage development activity, declining discretionary incomes and the soft, single-family housing market will continue to weigh on self-storage demand. Occupancy levels at self-storage properties are trending lower as job losses and falling home values encourage households to save more and avoid unnecessary expenditures.
In an attempt to mitigate occupancy decreases, owners have cut rents, causing revenue to decline. Newer assets built during the market peak in once high-growth areas are suffering the most from weak demand, with some markets operating at occupancy levels of 100 basis points below the national average (the low 70 percent range).
Additionally, it may take two or more quarters to determine whether aggressive leasing incentives and rent reductions will be enough to jumpstart tenant demand. Properties in close-in commercial and residential areas are expected to perform better in the short term. When the recovery gets under way, centrally located assets near established neighborhoods will likely benefit from more stable housing conditions and small businesses seeking additional space for expansion.
Development Decline in West to Offset Weaker Demand
Approximately 1.9 million square feet of new self-storage space will be added in the West this year, down from 4.4 million square feet in 2008. More conservative capital markets and soft operating conditions will restrain construction activity through 2010.
The planning pipeline contains 7.4 million square feet, a decrease from 12 million square feet just six months ago. The decline in development activity may help offset weaker demand. Additional inventory and a drop in housing-related self-storage demand have caused occupancy to trend lower during the past year.
As of the second quarter 2009, regional occupancy of 83.1 percent was down 490 basis points year-to-date, and down 680 basis points from the rate recorded in the second quarter of 2008. In response to declining occupancy levels, owners have trimmed rents by almost 2 percent since December 2008 to $1.14 per square foot. Significant construction activity over the last few years and a weak housing market have pushed occupancy in the Inland Empire of California to the low 70 percent range, the lowest rate in the region.
Investment activity remains limited due to a tighter lending environment and expectations for weaker operations in the near term. Transaction velocity has dropped 37 percent during the past 12 months, though it has plummeted 62 percent over the last two quarters when compared to the same period in 2008.