Self-storage construction spending hit an all-time high eight months into the year, topping $2.27 billion through August. With four months left to tally, that figure is already more than the $1.9 billion spent in all of 2016, representing an 89 percent increase year over year, according to figures from the U.S. Census Bureau.
While the highest monthly construction-spending total over the past 13 years was $199 million in December 2016, that sum has been eclipsed every month this year, beginning with $226 million in January and reaching $349 million in August, according to an interactive chart of Census Bureau data published by SpareFoot, an online marketplace for self-storage consumers. Prior to 2016, the highest spending total for any individual month since 2004 was $150 million in September 2009.
Though the development boom has raised concerns about oversupply in some markets, the surge can largely be attributed to lagging demand from the Great Recession, according to R. Christian Sonne, executive vice president of the Self-Storage Valuation Group of CBRE Group Inc., a commercial real estate services and investment firm. The annual “refresh rate” for self-storage should be about 1 percent of total supply, or 500 new projects per year, according to CBRE. “The concern of new supply has been exaggerated in my view,” Sonne told the source. “This refresh rate has only recently occurred. This suggests there was some pent-up demand and new construction is now making up for it.”
CBRE and the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage, recently released reports examining U.S. self-storage development and supply in 35 markets. The firms estimate supply and demand nationwide is generally at equilibrium this year, despite the surge in development activity. Part of the reason is the time it takes for projects to move through planning, financing, construction and eventually lease-up, while others never come to fruition, SpareFoot reported.
As a result, facility vacancies are expected to hover around 10 percent through the end of the year, according to Marcus & Millichap, a commercial property-investment firm specializing in self-storage. While some new facilities are reaching stabilization within 12 to 14 months, others are experiencing much slower lease-up rates due to new supply, said Ryan Clark, director of investment sales for SkyView Advisors, a self-storage investment-sales and advisory firm.
Developers are expected to take a more cautious approach moving forward. “It’s not that I think that 2018 is going to be any sort of a disaster year, but I do think that 2017 probably does mark the high watermark,” said Todd Amsdell, president and CEO of the Amsdell Cos., which operates the Compass Self Storage brand. “We are not really anticipating being any less active next year; what changes for us is the type of deals we end up getting involved in and the markets we are getting into.”
Developers are also likely to be affected by a slowdown in activity by self-storage real estate investment trusts (REITs), according to SpareFoot. “I think that without the REITs’ involvement, it is much more difficult for developers to find financing sources or people willing to lend them money to get these developments off the ground and moving forward,” Amsdell told the source. “I think there will be a drop-off and less properties getting built as we move into 2018 and certainly by the end of 2019.”
- SpareFoot Storage Beat: Self-Storage Construction Hits New Record