Self-Storage State of the Industry 2011: Real Estate

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New Construction

Despite the availability of land, new construction projects have declined four consecutive years in the self-storage industry. The outlook for development in 2011 remains bleak, largely due to a lack of available financing and the number of distressed and mature properties expected to come up for sale in oversaturated markets.

“The main problem with new construction is the lack of or nonexistence of construction funding,” says Grossman. “Until the current supply of distressed storage properties is resolved, new construction will not be in the pipeline.”

“There are plenty of entitled sites on the market, but nobody wants to build in this environment,” agrees Alter. “Anyone venturing into new development should be thinking all cash and had better do their homework.”

Conversions

Of course, a lack of new builds lends itself to an increase in conversion projects, which can breathe new life into underperforming properties and be attractive solutions for landlords looking for tenants that can generate income.

“I believe we will see many of the established operators considering conversions in markets where their properties are performing well. This will be driven mostly by the lack of construction financing and not necessarily because they like conversions,” notes Vestal. “In urban areas, where the barriers to entry are high due to a lack of available ground or entitlements, we will continue to see conversions play a major role in new storage projects coming online.”

Whether or not these projects occur quickly, however, is another matter. “[Conversions] will be more common, although it may be longer than a couple of years,” explains Barry. “With a lot of vacant space in retail properties, more landlords are considering all options, including self-storage. We have seen more inquiries into shopping center locations, especially where these properties need to derive some type of income.

“These locations do not offer the same type of main road drive-by traffic, but they do offer community traffic that frequents the local retail outlets,” he continues. “More property owners will likely consider any other type of vacant building, as well, but unless they are well-funded and cash deals, getting lenders to approve more self-storage development could be tricky for a few years.

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