Officials at Jernigan Capital Inc., a merchant bank and advisory firm serving the self-storage industry, believe the current rate of new facility supply coming to market has been largely overstated in terms of projects expected to follow through to completion this year and in 2018. The company forecasts development activity will peak between this year and the end of next year, followed by declines in 2019 and 2020, according to a press release.
“After months of talking to developers, analyzing data, monitoring activity, underwriting investments and challenging the conclusions of many commentators, we are projecting that the development cycle is in a two-year crest, with 2017 and 2018 deliveries projected to be roughly equal,” said John Good, president and chief operating officer. “We believe fewer projects are going into planning than in the past three years and a significant percentage of planned projects have a strong likelihood of being abandoned. Moreover, we project that deliveries will decline significantly in 2019. We believe the market will absorb the 2016, 2017 and 2018 deliveries in an orderly way, with a relatively short-term pressure on rates.
“In short, if the sector continues the current trajectory of new starts, we are expecting this development cycle to end with a soft landing in 2019 and 2020,” he continued. “In our view, this is good news for the entire sector and should generate a renewed optimism about longer-term returns on investments in self-storage, which returns have on average led the real estate industry over the past 23 years.”In a lengthy statement, Good discussed development activity in relation to population growth in major markets, outlined Jernigan’s view of industry dynamics during the last few years and was critical of “industry professionals” who’ve projected “as many as 900 deliveries nationwide in 2017 alone.” Jernigan scrutinized data from the U.S. Census Bureau and Yardi Matrix, the self-storage data-services platform of management-software provider Yardi Systems Inc., to make its development forecast for the top 50 U.S. Metropolitan Statistical Areas (MSAs).
The company estimates 27 million net rentable square feet from 337 new storage facilities will come online in the top 50 MSAs this year, a 2.9 percent increase over total supply in 2016. It expects a slight increase in 2018, forecasting about 28.5 million net rentable square feet from between 350 and 362 new facilities, which would be a 3 percent increase. In contrast, 438 facilities comprising 29.7 million net rentable square feet began serving the top 50 markets between January 2015 and December 2016, the release stated.
“The data indicates that rumors of the demise of the self-storage sector due to excessive new supply are wildly exaggerated on a national level,” Good said. “Our analysis indicates that estimates of new supply suggested by some within the sector could be as much as 80 percent overstated. In addition, we believe the development cycle began in 2015, with pent-up demand from the 2010-2014 period, when population growth and people leaving single-family housing significantly exceeded new self-storage deliveries.”
The Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage, and CBRE Group Inc., a commercial real estate services and investment firm, recently released separate reports examining the state of self-storage development and supply across the United States. The data from both publications was amassed from CBRE research, Argus accounts and several other sources, according to officials from both companies.
Though their statistics slightly differ, both reports conclude there’s been a large increase in new self-storage development this year. Argus estimates 750 storage facilities were built in the U.S. last year and expects 953 “new starts” in 2017. The Valuation & Advisory Services Division of CBRE estimates 947 new projects are scheduled this year compared to about 600 last year. About one-third of planned projects come to fruition within a three- to seven-year development cycle, according to both reports.
It’s unclear if Good was referencing these projections in his criticism of recent industry forecasts.
In its analysis, Jernigan placed eight MSAs on its “danger list” of markets believed to “present a higher risk of longer-term absorption issues and softened rates.” It also identified 17 MSAs for a “watch list” of markets believed to have “a higher risk of short-term absorption issues and rate pressure resulting from the cumulative effect of new supply being delivered in a compressed time period (2016 through 2017), but that we believe have plenty of depth and population growth to absorb this supply over a relatively normal stabilization period,” the release stated.
MSAs on the “danger list” are Austin, Texas; Charleston, S.C.; Charlotte, N.C.; Denver; Miami; Nashville, Tenn.; Portland, Ore.; and Raleigh, N.C. Those on the “watch list” include Boston, Dallas, Detroit, Houston, Milwaukee, New York, Phoenix, Pittsburgh, San Antonio, Seattle, St. Louis and Washington, D.C.
“Despite these markets being on either of [our] two lists, we continue to believe that self-storage development is a submarket-specific art within the science of measuring supply in broader markets, and we have invested in, and continue to find, compelling projects in certain submarkets in some of the MSAs on our danger and watch lists,” Good said.
Since Jan. 1, Jernigan has closed 25 self-storage investments totaling $321 million. The lender typically holds a 49.9 percent profit interest in its joint-venture transactions, according to company officials. Those projects include an $11.2 million investment in Denver, $14.7 million in Miami and $8.9 million in Raleigh. Development co-investments in “watch-list” markets include $8 million in Jacksonville, Fla., and $9.9 million in Louisville, Ky.
Jernigan Capital is a commercial real estate finance company that provides financing to private developers, operators and owners of self-storage facilities. It offers financing for acquisition, ground-up construction, major redevelopment or refinancing. The firm intends to be taxed as a real estate investment trust and is externally managed by JCap Advisors LLC.