Self Storage Industry Review
Self storage fared better than every other commercial real estate sector during this past recession. However, we learned that the sector was not "recession-proof”, but more "recession-resistant". After two years of losses (9 consecutive quarters), the four publicly traded REITS turned the corner and now have reported five consecutive positive years’ performance. Occupancies are up; concessions are down; and rental rates are finally climbing back to pre-recession levels. REITS, in general, have out-performed the S & P and Dow Jones Industrials.
The self storage industry has finally begun to consolidate as the number of new construction starts diminished for five consecutive years from their peak in 2006. The industry literally doubled in size from one billion to two billion square feet from 1995 to 2006. There will be 600-800 new construction starts in 2016 and probably 1,000 starts in 2017. The top twenty operators in the USA control only 15% of the total market, but have a larger share within the top 50 markets. But we may see that change as the REITS, flush with investment cash, acquire and increase their market share in select markets. Similarly, other new sources of institutional monies have been watching the sector and have concluded that self storage returns are as dependable, or even more secure, than the other traditional commercial real estate asset classes. These new funds/buyers are very competitive with the REITS and have forced Cap Rates down to the mid-5 % range for stabilized, class "A"-good quality facilities located in the top 10 markets. Cap rates in secondary & tertiary markets remain in the 6-8% range depending upon the age of the facility; location of property and its demographics.
With regard to financing, self storage continues to enjoy the lowest default rate of any other sector in the CMBS market. While banks and life insurance companies are more conservative in their underwriting than they were pre-recession, other sources of financing have emerged, including credit unions with an expected 30-35% equity contribution, SBA financing, and mezzanine financing for short term situations. As we look ahead to the remainder 2016, we should see industry performance continue at its high level & consolidation from the larger operators, such as the $1.2B acquisition of Strategic Storage Trust by Extra Space; the $788M acquisition of Simply Self Storage by Brookhill, and the current $1.3B acquisition of Life Storage by Uncle Bob’s Self Storage. In addition, there will be more certificate of occupancy type deals coming through the development pipeline as our industry has finally created a “merchant builder” class of developers providing true class A assets.
Nicholas J. Malagisi serves as national director of Self-Storage and Senior Advisor for SVN, specializing in the purchase and sale of self-storage properties.