While the Australian self-storage industry has been affected by the global financial crisis, it has been mostly regional. Towns where unemployment has risen seem to be affected more than others, and there are sites that have defied the trend altogether.
After a peak in occupancy levels in 2007 and 2008, there has been a gradual, modest decline. Inquiry from new renters has dropped 10 percent to 20 percent, but seemed to have returned to just under the industry’s long-term averages.
The competitive climate has changed, though. Operators have dropped their prices, and consumers are certainly more cautious. The majority of properties have lower street rents than they did 12 months ago. However, price wars bottomed in March 2009. Now, we can just hope for stability. We don’t expect growth this year, and next year will also be a grind.
Lease-up for new facilities has continued roughly in line with expectations despite the softening economy. If anything, the properties serving more affluent neighborhoods seemed to have slowed more, while less affluent and middle-class areas are faring better.
The global financial crisis has also impeded some proposed new-development sites. Lower valuations and loan-to-value ratios have necessitated additional equity from investors who may not have the capacity or appetite to put in more. This will inhibit growth in supply, and will help to ensure the industry doesn’t suffer painful imbalances. As always, there is some localized market over supply.
Industry suppliers have settled into a much slower pace than that of a year ago. Some report business is down by as much as 75 percent. There’s not the frenetic building activity seen in the past. Owners are cautious about new development, and some have found that financing has evaporated.
The major factor affecting self-storage suppliers in Australia has been difficulty in obtaining financing for capital works. Some banks now view self-storage as a riskier business than it was just a year ago. Capitalization rates have slipped, and potential investors are finding it increasingly difficult to make the numbers work. There are few sites changing hands.
On the positive side, for those who are able to obtain funds and wish to expand or renovate, there has never been a better time than now. Suppliers are more than willing to look at reduced margins to keep construction crews together and ride out the difficult times.
Material suppliers, particularly steel, are finding the general downturn in the construction industry is causing massive shortfalls in sales figures. They’re now reducing their prices as fast as they increased them during the shortages from just a few years ago. If owners are thinking about using this slow period in their business as a time to lift the appearance and performance of their facilities, now is the time to do it. Deals are everywhere.
Australia has yet to enter a “recession,” technically, and there is some conjecture that the country will. Unemployment is still low (less than 6 percent), and the full force of unemployment increases are to be felt. Some operators report collections are becoming more difficult and, given the tight market, that’s to be expected.
The finance market has become concentrated, with the big banks taking over smaller rivals. This has led to some additional tightening of lending criteria, more than the pricing and risk pressure resulting from the financial crisis. Financial covenants are tighter, which invariably means any self-storage funding requires greater equity from investors. However, the Australian banks are not closed and are continuing to lend to existing customers.
The last 12 months have also given some operators the chance to review operations with cost-reduction in mind, and some have implemented key changes and staff reductions.
The federal government has pumped $40 billion into the local economy in an effort to underpin current business. It remains to be seen if it flows to the self-storage industry, although a number of operators have reported their debt reduced after their customers received stimulus checks.
Overall, the industry has an optimistic view with the current period being seen as one of consolidation and review.
Dallas Dogger is the CEO of Brisbane, Australia-based Centreforce IT, an installer of self-storage access-control, CCTV and door-alarm systems throughout Australasia. Sam Kennard is the managing director of Kennards Self Storage. For more information, visit www.centreforceit.com.au and www.kss.com.au.