The self storage industry in the US has never been more varied than it is today. It’s all over the place.
In Las Vegas rents are up 70%.
In Denver, rents are down 5%.
In Dallas, about 22% more square feet of self storage has hit the market in the form of new construction. But there are still submarkets with less than 3 square feet of self storage per capita.
Transactions are down but Wall Street wonders if there is a bubble.
The industry is very scattered.
What Does This Mean For Your Business?
It’s a function of where you currently have your facility or the market and submarkets where you’re looking to open a facility.
At the recent ISS (Inside Self Storage) Expo, what was going on in the industry depended on what room I went into.
Everyone seemed to have a different take.
Here are some facts I was able to piece together:
- In 2017, about 430 new facilities came online nationally creating 31 million square feet of new product.
- It’s estimated that in 2018 460 new facilities will hit the market creating an additional 34 million square feet of self storage.
- After 2018, new space hitting the market is expected to slow down.
Now let’s put this into perspective. There were years in the 90’s when over 50 million square feet hit the market in a given year.
How This Affects the Smaller Investors
So as small investors, what should we be thinking or looking for?
First, it’s never been more important than it is today to know the data. Data about the markets and submarkets where you not only own facilities but where you’re considering your next project.
We know that today, about 11% of households use self storage.
We know that in cities or market areas where there are a large number of baby boomers, self storage does really well.
I have also started realizing that the self storage industry mirrors the apartment industry. It just lags about one or two years behind. If you want to see how self storage will look in a particular market in the next year or two, look at the current state of the apartment industry in that market.
Obviously, this is not 100% accurate, but pretty close from what I can tell.
Putting Everything Together
After putting together the pieces I learned at the 2018 ISS Expo in Las Vegas last month, here is what I predict for 2018:
- Oversupply will not be catastrophic. It will have an effect in some markets and submarkets, but there will be no big bubble burst or anything like that.
- Income growth and rental occupancy growth will be sluggish. If you are in lease-up, you will most likely be slower than anticipated.
- NOI’s are going to have more weighing them down than the past few years.
Income growth is slugging, plus…
- Operating expenses are going up. Property taxes have caught the eye of tax assessors in most markets. Remember, they have their own conventions too.
- Marketing expenses will also go up in sluggish markets.
- If you are developing new facilities, I would definitely consider phasing in the projects to keep carry cost down.
Use data to make decisions:
In most areas of the country, you can get accurate data metrics now around supply, population, households, etc.. It is rare to be caught off guard with a feasibility report, but still get your own data first, especially for new construction, expansions or conversions.
For years I have been projecting a 3% income growth and 2.5% expense growth in my underwriting of projects. For the most part, I will still use that in 2018.
All of this points to being careful and strategic as you start or grow your self storage business. But this is not new news. We should be doing this anyway.
There is no reason why as small investors we can’t operate at a very sophisticated level.
Approach getting in the business or doing your next project using real data and numbers. Also, be realistic about what the next few years are going to be in the industry, and you should be fine.
All I really know is if you are in the business, your project over time will almost always increase in value and create real wealth. If you are on the sidelines waiting for something, you are watching others grow their wealth while you watch.
Self storage is still the best business there is. Especially for the small investor.
I tell people I am working with to be smart, be strategic, be safe, but be all of those things while you’re in the self storage business not waiting to get in.
