At this point, several factors will come into play: The demand for storage will increase, economic vacancies will continue to decline, rental rates will start increasing, capital rates will decline, and investors will become more interested, Wilson says. "We are at or nearing that point in the cycle, and some owners are starting to gear up for development. For now however, there are still opportunities for greater yields thought acquisition vs. new construction."
Charles (Chico) LeClaire, senior vice president of investments and senior director of the National Self-Storage Group for Marcus & Millichap Real Estate Investment Services, a commercial real estate brokerage firm based in Denver, agrees new construction may be around the corner. "If the trends continue, we're going to see more new construction, and that will add new players into the market. The REITs will continue to buy, and developers will start to build again."
In fact, some development has already begun in select markets, according to Ben Vestal, president of the Argus Self Storage Sales Network, a national network of commercial real estate brokers specializing in self-storage real estate. "This will continue as long as construction financing continues to improve and self-storage continues to produce high returns,” he says.
Will Consolidation Continue?
Although development may be on the horizon, acquisition is still the most efficient way for the REITs and larger companies to expand, and self-storage experts expect this trend to continue well into 2013. "Abundant capital from private equity funds, private operators and public companies, combined with low costs of capital for acquisitions should maintain the recent acquisition trend," Boorstein says.
In fact, operators should expect industry consolidation to continue for the next few years, says Stephen Grossman, senior vice president of NAI National Self Storage Investment Group, a real estate brokerage firm in Newport Beach, Calif. "Commercial mortgages are maturing, and owners need to choose between refinancing or selling. If market values have decreased and appraisals are weak, the owner may be compelled to add equity to a refinance. This could be enough motivation to the owner to consider a sale."
While this may mean fewer smaller operators, it doesn’t mean an end to self-storage as we know it. "There may be fewer single-site operators as consolidation increases, but more than 80 percent of self-storage is small operators. So the trend will continue, but few will feel it," Sonne says.
As the industry matures, the best will survive and the weaker will be either bought or out-competed, Vestal says. “Within the self-storage industry, there are some very competent and qualified small operators who will fare just fine over the long run."