By Jay Fitzgerald
Reprinted with permission from "SpareFoot Storage Beat.”
This past year was yet another banner year for the self-storage industry in America, with increasing revenue, high occupancy rates, low capitalization (cap) and interest rates that made transactions attractive, and high demand but low supply of space that encouraged new construction and conversions. So how can the industry possibly repeat that performance in 2017? The answer: It probably can’t and won’t.
“There will probably be a slowdown, but it’s still going to be solid,” says Marc Boorstein, a principal and co-founder of MJ Partners Real Estate Services, a Chicago-based self-storage broker that deals in public and private industry transactions. Not that the industry won’t make a good run for another championship-like year in 2017. But most experts say it will just be tough to repeat 2016’s stellar performance. “Everybody seems to be ratcheting down just a little bit,” Boorstein says.
With 2016 in the rearview, here are six trends to watch this year.
Will the REITs Recover?
There was a tentative slowdown occurring late last year, with revenue for self-storage real estate investment trusts (REITs) down from a range of 5.7 percent to 8.5 percent growth in the second quarter to 4 percent to 7.2 percent growth range in the third quarter, according to Boorstein. Facing pressure to maintain record-high occupancies and lease up new facilities, the REITs increased discounts and backed off aggressive rental rates, resulting in diminished revenue growth.
That has, in turn, spurred an investor selloff. Over the course of 2016, stock for Public Storage Inc. declined about 12 percent, Extra Space Storage Inc. and CubeSmart dropped by more than 16 percent, and Life Storage Inc. (formerly Sovran Self Storage) plummeted by more than 25 percent.
Will Record-High Occupancy Hold?
The good news for the industry is occupancy rates are still high, hovering in the low 90 percent range for large public and private self-storage owners. The occupancy numbers are a little lower for smaller companies, but still solid. “Every indication is that demand will not slack off. Demand [for space] is still solid,” Boorstein says.
Will Valuations Fall?
Connie Neville, a co-chair at SVN Commercial Real Estate Advisors, agrees there will probably be a slowdown in 2017. Higher interest rates—sparked by the U.S. Federal Reserve’s recent quarter-point hike in short-term overnight rates—could dampen activity and hurt values a bit, she says, especially if the Fed keeps raising rates in 2017 as it’s indicated it would over the course of the year.
That, in turn, could hurt cap rates, which are now at historical lows as well as impact transactions. “It’s going to be less feverish, a little bit off the robust pace this past year,” Neville says.
Will the Pace of Acquisitions Moderate?
Nick Malagisi, Neville’s colleague at SVN Commercial Real Estate Advisors, notes sale transactions in 2016 were hovering around $5 billion by the end of the year, up from $4 billion in 2015. He expects “a diminished but still healthy” number in 2017 compared to this past year.
Most industry experts believe self-storage REITs may pull back from their torrid pace of transactions in 2017, says Steve Mellon, managing director of JLL Capital Markets, a commercial real estate firm. However, private-equity investors, who’ve become bigger players in the industry in recent years, could pick up the slack. “You’re still going to see transactions at a good clip, but perhaps involving different players,” Mellon adds.
Will New Construction Affect Pricing Power?
At one point this past year, construction was running at a 124 percent annualized clip over the previous year, according to government and industry estimates. But industry experts are divided as to whether that translates into an overbuilding that could eventually bring down rental rates.
There might be geographic pockets of overbuilding of new facilities, such as in Denver and Miami, Malagisi says. Others point to possible overbuilding in Texas and parts of California.
“But, overall, we’re not going to see have a problem with absorbing new products. Demand is still strong,” Malagisi adds.
Boorstein isn’t as sure. “We just don’t know how it will turn out,” he says of strong construction trends nationwide. “There could be some market-to-market jolts, depending on how much is built and where.”
How Much More New Development Is Coming?
Tom Doyle, director of the national storage team for commercial real estate firm HFF (Holliday Fenoglio Fowler LP), estimates there’s still about $1 billion in new construction already permitted across the country, and there’s also a lot of liquidity in the market for more development. “Hopefully, we’ll see responsible development,” he says, noting there’s room for growth in urban areas and in-fill construction in quality neighborhoods.
Anne Hawkins, an executive vice president at real estate research firm STR Inc., is also hearing of possible overbuilding in Nashville, Tenn., Portland, Ore., Chicago, and other cities. But no one is sure if it’s reached a level to be overly concerned.
“People are just being a little more cautious these days. But my gut says the industry will do well overall. It should be a good year,” she says.
Jay Fitzgerald has more than 20 years of experience covering business and economics for publications and online sites, with a growing emphasis on blogs, social media and podcasts. He’s a content write for the “SpareFoot Storage Beat.”
