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Self-Storage Industry Consolidation: Is the Trend as Prevalent as Owners and Investors Believe?

By Michael Mele Comments

At first glance, it may appear as though the self-storage real estate investment trusts (REITs) are acquiring every property on the market. However, this is hardly the reality.

In this article, I’ll dispel some of the anxiety surrounding industry consolidation and discuss the related challenges and implications. I’ll also look at future trends while taking a big-picture view of what’s happening with self-storage ownership as we approach the next decade. Despite the belief that industry consolidation is occurring rapidly, the data demonstrates otherwise.

A History

REITs account for just 13.4 percent of the 41,879 facilities in the nation, according to the “2017 Self-Storage Almanac,” an annual publication of industry data. With the remaining top 100 owners/operators accounting for another 10.8 percent, this leaves 76 percent of storage properties held by smaller regional and local owners.

Many of these owners might believe the best option for a sale would be to allow a REIT to acquire their property. However, the REITs are very selective in the assets they choose. Their strict set of requisites opens the door for competition from larger institutional groups and regional owners who are willing to pay competitive prices for assets that don’t necessarily fit the REIT criteria.

The REITs typically look for assets with 50,000 to 80,000 rentable square feet, in densely populated areas in larger metropolitan markets. Although there are many institutional and regional investors that will acquire assets in an urbanized area—defined as one with a minimum population of 50,000—the U.S. Census Bureau indicates there are fewer than 500 of these markets in the U.S.; and many won’t yield the density the REITs require.

In addition, most REITs seek ideal assets that meet other requirements. For instance, facilities that include retail or mixed-use components, or ancillary income from ancillary services such as a car wash, may fall short of the criteria. However, other investment groups might be willing to pay for those assets to build their portfolio. With these varying acquisition requirements, most facilities don’t fit within the REIT standards.

Beyond this, REITs are looking for economies of scale, providing management efficiencies and abilities that allow the subject property to be competitive with advertising and strong search engine optimization (SEO). While they have large market shares in many of the nation’s top Metropolitan Statistical Areas, outside of these markets, they can’t operate as effectively. Simply put, there are many communities in which a local owner or smaller regional operator is more competitive than a REIT. Because of this, there will always be room for a multitude of investors and owners in the industry.

Big Sales

Last year, several large-scale REIT acquisitions took place. One of the largest deals of the year was Sovran Self Storage Inc.’s purchase of LifeStorage LP’s 84 properties in nine states for more than $1.3 billion. National Storage Affiliates Trust (NSAT) was also aggressive over the past year, acquiring 22 California properties for $154 million. It also bought the iStorage portfolio for $630 million, adding 66 properties across 12 states and 24 markets, and another 26-property portfolio for $184 million.

Despite 2016’s big sales, my team has observed a slowdown this year in large acquisitions from the REITs. With these companies projecting slowed revenue growth due to increased supply as well as a ceiling on market rents in some urban areas, there’s been a decrease in their trading value. This loss of value has impacted their ability to pay what owners are expecting for assets, slowing the acquisition pipeline.

We’ve also seen a slowdown in the sector’s quarterly transaction volume. The third quarter of 2016 was at a peak of about $2 billion in sales, while the fourth quarter was at $1.8 billion. Meanwhile, the first quarter of 2017 slowed to $727 million, down 25 percent year-over-year, according to Real Capital Analytics, a firm that provides data on the commercial real estate investment markets.

New Development

On the development side, only a small portion of the proposed, in progress or newly completed projects are anticipated to originate from the REITs. Specifically, of the 387 recent self-storage completions nationwide, only 5.7 percent have shown to be backed by REITs.

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