With a general absence of new self-storage development during the past half-dozen years, the lack of new competition has helped the industry’s established stores achieve record high occupancies along with handsome profits. In addition, improvements in the job market and new housing have placed rising populations in the path of many storage facilities.
From the industry’s top operators to single-store owners, the rising
tide of prosperity has strengthened the balance sheets of numerous self-storage
operations in the U.S. and Canada.
For example, Utah-based Extra Space Storage, a Real Estate Investment
Trust (REIT), announced an increase in same-store revenue by 9.2 percent during
the first nine months of 2015, and same-store net operating income (NOI)
improved by 12.1 percent compared to the same period in 2014. Same-store
occupancy rose to 93.6 percent as of Sept. 30, 2015, compared to 91.6 percent
12 months earlier.
CubeSmart, a Pennsylvania-based REIT, reported same-store revenues for
the third quarter of 2015 increased 7.4 percent, and same-store net operating
income went up 9.3 percent over the same period in 2014. Same-store physical
occupancy was 92.7 percent in September, compared with 91.6 percent for the
same quarter of 2014.
Other top operators report similar returns for the year. Devon Self
Storage of Emeryville, Calif., ranked No. 22 in Mini-Storage Messenger’s “Top Operators” list, estimates revenue
growth of more than eight percent on stabilized properties in 2015, and NOI
growth in the 10 to 12 percent range, according to CEO Ken Nitzberg.
Irvine, Calif.-based Westport Properties, which operates 13th
ranked US Storage Centers, reports revenue for same-store stabilized assets
increased nearly 13 percent in the third quarter compared to the same period in
2014. NOI was up in the third quarter almost 19 percent over the same period in
“This is literally the best result we’ve seen in the history of the
company—definitely in the last 10-plus years I’ve been here,” says Charles
Byerly, president of Westport Properties. “It was an off-the-charts year.”
A new year usually begins with optimism as well as some trepidation.
After these glowing financial reports for the storage industry, some may wonder
if this performance is sustainable in 2016. While optimism runs high and
business fundamentals remain strong, opinions differ on what may lie ahead
during the next 12 months.
Is It Sustainable?
The Self-Storage Almanac
shows that physical occupancy has increased steadily since 2011 as the economy
improved. This trend has allowed for rent raises in many markets. Meanwhile,
property values have escalated like a runaway train, aided by new money
entering the industry from non-traditional sources. The industry’s momentum
entering 2016 is a rush, and it promises to continue for the near future.
“The run will continue,” predicts Aaron Swerdlin, executive managing
director of NGKF’s Self Storage Group. “Heading into the first quarter of the
year, record high occupancies should enable further rental rate growth.”
Rents are expected to increase faster than the rate of inflation in
major markets this year as in recent years. “Self-storage rents in the top 25
MSAs [Metropolitan Statistical Areas] have been going up four to 10 percent a
year depending on the market,” Nitzberg says. “That will continue, because from
2007 to 2012 we weren’t able to raise rents. In fact, most operators were
dropping rents to keep or attract tenants. So part of it is catch-up.”
Shawn Hill, principal of The BSC Group in Chicago, summarizes the
state of the industry this way: “It’s extremely strong; I don’t know a part of
the market that’s weak. Debt terms are phenomenal; tons of capital to support
transaction activity; cap rates are very low, so sellers are enjoying the best
price per pound that they’ve seen in a long time; and banks are lending at
He has one caveat, however. “My biggest concern is I’ve experienced
this before and eventually the balloon popped,” Hill warns. “How long is this
level going to be able to sustain itself?”
Byerly foresees a tapering off of the profit surge. “I don’t think
it’s sustainable,” he says. “We’re not budgeting for large increases; we’re
budgeting for three to five percent rent increases for 2016.”
Extra Space had an “incredible year,” according to CEO Spencer Kirk,
but the REIT’s performance may be hard to duplicate in 2016.
“Due to record-high occupancy levels and strong pricing power, revenue
and NOI growth were both at all-time highs,” Kirk says. “As a result, it is
difficult to say with certainty we can match that growth in 2016. However,
fundamentals for the self-storage industry are as strong as ever, and new
supply remains muted. So, I believe 2016 will be another great year.
Performance just may drop slightly from exceptional to really good.”
The prospect of a slow rise in new facilities is one reason some
experts believe the next year will continue to be bright for storage.
“Based on the still somewhat
muted amount of new supply expected in 2016, we believe the industry will
continue to deliver strong year-over-year results into 2016,” says Guy
Middlebrooks, CubeSmart’s vice president of third-party management.
New Stores Develop Slowly
Construction of new stores has ramped up over the past 12 to 18 months
as more money has become available for development. Industry professionals
expect between 200 and 600 new stores to open for business this year, however
that may not be enough to meet the growing demand for storage.
New facilities tend to be more complex projects and must clear
numerous community hurdles than even a decade ago. Construction times are now
greater than a year.
“They’re all challenging, and you don’t know where the major challenges
are going to come from within that deal, whether it’s going to be entitlements
or construction costs,” Byerly says, estimating that between 300 and 400 new
facilities will open in 2016. He leans toward the low end of that range because
of the difficulty of constructing new facilities in many areas.
Nevertheless, development is inevitable because of growing
populations, and developers are accustomed to negotiating the rough terrain.
“We’re a developer by nature, so we’ve been pushing that button really
hard,” Byerly says. “We’ve expanded our development team significantly over the
last year. That spigot has been turned on full blast. We’re in various stages
of development on about a dozen assets across the nation, and we’ll continue to
seek out development deals for 2016 to continue to grow that pipeline.”
Nitzberg estimates new development on the high side—between 500 and
600 new facilities in 2016. “We’ll see new additions, but most knowledgeable
people in the industry will tell you we need quite a bit of new supply to get
up to where the current demand line is,” Nitzberg says. “We’re not going to hit
that in 2016 or 2017. Because we’ve built next to nothing over the last six or
seven years, we could probably absorb a couple thousand properties a year for
the next three or four years and still not be oversupplied.”
Metro areas are the development targets of most large operators;
however, opportunities still lie in secondary markets, especially where new
housing is being built. “We
will see development happening in both top MSAs as well as smaller vibrant
markets,” Middlebrooks says, adding that CubeSmart expects between 200 and 250
new assets will open in 2016.
Extra Space estimates approximately double that number for the year.
“You will see pockets of new supply in Chicago, the boroughs of New York, and
South Florida,” Kirk says. “I project the bulk of the development will be in
secondary and tertiary markets where it is easier to develop.”
Swerdlin also sees developers focusing on New York and Florida along
with Texas. The new stores will tend to be located in concentrations around the
U.S. where demand is high. “The industry isn’t having a significant number of
properties from coast-to-coast and border-to-border,” Swerdlin observes. “New
supply isn’t really going to come online until the end of 2016. I think 2017 is
probably when we’re going to hit a run rate of several hundred deliveries a
year, but even that is manageable when you consider the size of overall
Private Equity Firms Add Competition
The volume of self-storage acquisitions in 2015 was on par with 2014,
according to Swerdlin, however he saw more of the smaller transactions than in
“If 2015 winds up being greater on volume it will be because of
one-offs,” Swerdlin says. “2016 will continue to see an elevated dollar volume
but probably an average number of transactions. Deals that are getting done are
on average larger than they’ve been historically.”
Extra Space made the biggest splash in 2015 with the acquisition of SmartStop
for $1.29 billion. SmartStop was the seventh largest owner and operator of
self-storage facilities in the United States at the time of the purchase,
operating 169 properties in 21 states and Canada.
The acquisition gives Extra Space opportunities to increase revenue
and NOI through improving occupancy and pushing rental rates. “Storage has
become a game of size and scale,” Kirk says. “This transaction increases our
footprint by 15 percent, and it gives us a stronger foothold in many of our
existing markets. This scale will make us more efficient in acquiring customers
online, controlling expenses, and operating our stores.”
An emerging wrinkle in the acquisition game is the new money from
private equity sources chasing a limited number of storage properties. This has
added competition for storage REITs and other players in acquiring prime
“The acquisitions market has become increasingly competitive due to
the influx of capital trying to invest in storage,” Kirk says. “We do not
anticipate increasing our acquisition activity in 2016, because topping this
year’s $1.8 billion would be a difficult task. However, we plan to continue to
acquire intelligently and accretively.”
Swerdlin says the sources of institutional capital are diverse, ranging
from Wall Street to individual families. However, private equity firms that
don’t operate from within a major platform that generates multiple sources of
income and economy of scale advantages will continue to struggle to compete for
major portfolios and may have to seek partners in secondary markets. “When you
look at the top 15 or 20 operators, every one of those are candidates to
capitalize a platform,” he says.
Acquisition activity has been dominated by well-capitalized players
who pose formidable competition for the deal, according to Hill. “The smaller
operators or people coming into the space are having a harder time finding
acquisition sites because REITs and large buyers are so active,” says Hill.
“That’s why a lot of people are turning the page and saying it’s time to
develop because it gets back to real estate fundamentals. What is my price per
pound relative to what it would cost to build?”
Some of the larger operators including Westport are finding tough
sledding in the acquisition market. And it looks to be intensifying. “My fear
is there are probably three or four private groups that are pushing to go
public that are being ultra aggressive now, and there are public entities who
have very efficient cost of capital that are chasing deals very aggressively as
well,” Byerly says. “When you have that much activity at the upper end of the
market and newcomers coming in, that makes for a really hard market to buy
assets in for us.”
Economic prosperity is never going to be a straight line up forever,
and eventually the trend line tapers off and starts to fall. Could 2016 be the
year the gravy train hits a cow on the tracks? What are the potential obstacles
that lie ahead that could derail the momentum of the last few years?
With development accelerating even at a modest level, some industry
professionals have flashbacks to a time when overbuilding combined with a bad
economy brought down occupancies and rental rates. Byerly foresees a potential
oversupply in some sub-markets where there has been an aggressive push in
development such as in South Florida, the boroughs of New York, New Jersey, and
But overbuilding in 2016 probably won’t have nearly the impact it did
during the Great Recession. “I don’t think there’s anything macro that’s going
to derail the industry,” Byerly says. “There are lots of things that could
happen, but I don’t think any of them will happen.”
With accelerating facility values, property taxes pose a potential
obstacle going forward. “Because the values of properties have gone up so much,
assessors hammer you with new tax rates to the point where they’re almost
destroying the ability to transact an asset,” Nitzberg says. “Every city,
county, state, and special revenue district are always looking for new revenue
sources. In certain markets, we can’t raise rents enough to cover the increase
New regulations arising out of Dodd-Frank legislation could affect
pricing in the debt market as lenders try to wrap their arms around these
rules. “A lot of new regulations that they created out of the economic storm
are just now coming into fold,” Hill says. “As those regulations become reality
and lenders have to work within the confines of that new system, you will see
some potential obstacles and risk being passed along to the borrower. That is
something that could have an impact on rates and on the cost of capital.”
The inevitable Federal Reserve rate hike has hovered over the U.S.
economy for the past year. Raising the Fed rate will make borrowing more
expensive and some economists fear it will nudge the economy toward a
recession. Could this be the linchpin that tosses the economy into disarray?
“A lot of people talk about interest rates being a problem, but I
don’t see long-term rates going up materially to affect where values are,”
Byerly says. “I think there will be a compression of lender spread that will
keep rates in a reasonable range.”
It’s not necessarily when the Fed raises the rate that impacts the
economy, but how often and how much. “I don’t think you’re talking about a rate
spike; rather, I think rates are going to trend upward slowly and
methodically,” Hill predicts. “People are focused on what the Fed is going to
do. What I always tell borrowers is, don’t worry about that, worry about making
the right financial decisions for your property. Rates are going to be low
compared to historical averages for some time going forward.”
Self-storage has proven to be recession resistant, although the hit
still hurts. It’s the difference between being confined to bed for a few days
with the flu as opposed to landing in the hospital with pneumonia. “Unless
somebody legislates interest rates or laws confined to just self-storage,
storage will continue to outperform because there’s a lack of alternatives,”
Swerdlin says. “This is a product type that will continue to outperform its
other investment real estate peers by quite a bit. If the whole market feels an
impact, we’re going to feel it less than everybody else. If the market
continues to expand, we’re going to expand at a greater rate than everybody
David Lucas is a freelance writer and editor based in Phoenix, Arizona.