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Unparalleled Momentum Pushes Self-Storage Real Estate Into Uncharted Territory

By Ben Vestal Comments
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Over the last three years, the self-storage real estate market has been the best ever. Interest rates have remained low; lenders are aggressive; industry information is getting better; values have risen rapidly; net operating income (NOI) has grown; and large institutional investors are buying assets. All this positive energy and performance has supercharged the development cycle, pushing the industry toward uncharted territory.

Historically, self-storage value has had more to do with where the industry is in the real estate cycle and market sentiment than actual property performance. Most independent owners still appear to be selling primarily because of life events, with few deciding to capitalize on the current market. However, it’s also apparent that institutional investors are taking notice of market conditions and choosing to sell some or all of their holdings, while being disciplined with regard to acquisitions. Concerns about new supply and rising real estate taxes seem to be at the forefront of everyone’s mind.

The prosperity of the current cycle has lasted longer and gone further than anyone expected. While the value of self-storage investments slowed in 2017, demand has remained strong. We continue to see new supply come online at a higher rate than previous development cycles, reflecting a planned-to-start ratio in the range of 40 percent to more than 50 percent in some areas.

The effects of new supply will be even more impactful in 2018, reflecting multi-year lease-up of prior-year deliveries. It’s anyone’s guess as to when the market will officially tip into the downward trajectory, but all signs point to this occurring in the next one to five years. In my opinion, self-storage is past the peak of the current real estate cycle. New supply and changing market dynamics will have an impact on performance during the next few years. The good news is, as we move through the cycle, there will be new opportunities, ushering in the upswing of the next.

Market Trends

In the last decade, self-storage has evolved from a mom-and-pop investment class to a mainstream, institutional asset class. The industry weathered the Great Recession and is now reaping the benefits of strong market fundamentals. Heading into 2018, let’s examine some key trends that will continue throughout the year.

Industry growth. One significant factor that makes self-storage a better bet in the long run than many other real estate types is its customer base is growing faster than the population. There are two key drivers providing the industry with tremendous leverage. First, many Americans have still never used the product. It’s estimated that 50 percent of new tenants are using it for the first time; and in many areas, there’s still unmet demand. Second, after about five to eight years, many operators report that an increase in business—more than 50 percent—comes from repeat customers.

If you combine those two factors, it’s clear consumers are still learning how to use self-storage, and they’re using it repeatedly once they do. The point is this type of growth isn’t limited to population and job increases. It gets a boost from consumers moving up the learning curve as well as ongoing changes in America’s housing products.

New supply. Development activity from 2017 and 2018 will deliver meaningful new supply to almost every major market. This will undoubtedly influence submarket fundamentals where new properties are being built. It’s no surprise that the regions seeing the largest influx of new development are those that have enjoyed great population and job growth during the last two to four years. Markets such as Dallas; Denver; Austin, Texas; Portland, Ore.; Atlanta; San Jose; and Tampa and Orlando, Fla., are all seeing a massive amount of new product.

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