By Rachel Adams
A decade ago, there were few cities without one or more new self-storage projects underway. But as more facilities were built, consumer demand was met. Then came a recession that dried up construction bank loans and left blueprints collecting dust.
Today, ground-up development of self-storage facilities has given way to consolidation, with the real estate investment trusts (REITs) and larger, private companies leading the charge. Rather than building new, these companies have turned to up-and-running facilities to save time and collect the existing cash flow already being generated.
"It’s faster to acquire than to build new properties," notes Marc Boorstein, a principal of MJ Partners Real Estate Services, a real estate brokerage and investment-banking company in Chicago. "The long lead time to get new developments permitted, built and then leased up to stabilization has partially caused development for REITs to virtually cease. Additionally, the difficulty in obtaining construction financing for large-scale programs of new development has limited new construction."
Consolidation has also accelerated over the past two years as more properties have become available and banks began to lend again. "In 2011, public REITs purchased approximately $1.6 billion of self-storage properties as compared to about $400 million the year before," Boorstein says.
An established tenant base and cash flow are a natural draw of acquisitions, says Jason Allen, co-owner of Performance Self Storage Group, a Redwood City, Calif.-based self-storage brokerage firm. "When you look at the cost to build compared to the sales prices and price per square foot paid on the most recent transactions, it only makes sense to buy a pre-existing facility with built-in cash flow on day one.”
Consolidation and the Private Operator
While consolidation has picked up, its impact has only greatly affected operators in the top metropolitan areas, real estate experts say. This means the industry is still primarily in the hands of small-business owners, which are typically single-site operators.
"It’s important to remind ourselves that the majority of consolidation we’ve witnessed thus far has involved what those within the industry refer to as class-A facilities, and more than 80 percent of those facilities are within one of the nation’s top 50 largest markets," says Charles Ray Wilson, founder and principal of Self Storage Data Services and a partner in the Self Storage Industry Group (SSIG) of Cushman & Wakefield, an Irvine, Calif.-based commercial real estate firm. "What that means is for the majority of smaller, private operators, consolidation is not a threat."
Jim Chiswell, a self-storage consultant and president of Chiswell & Associates LLC, agrees the biggest impact has been in the top metropolitan markets. "In most major cities, the 'big boys' have commanding market positions. However, when you get out to the second- and third-ring suburban markets, and virtually all rural markets across the United States, the realization is the top 100 operators still command less than 50 percent overall market share.”