LifeStorage, a new state-of-the-art facility at 333 W. Ohio

CHICAGO—REITs and private buyers have been buying self-storage properties at a fast clip for several years, and it’s easy to see why. The sector, long-dominated by small operators, has had high occupancy and the larger, more sophisticated self-storage businesses have maintained strong growth in NOI. But even though investors have flocked to the properties, banks seem to keep their distance from proposals to build additional self-storage developments.

“It’s surprising that construction is so slow,” Marc A. Boorstein, a principal of Chicago-based MJ Partners Real Estate Services, tells, “since demand has not slowed down at all. But when you open up a new self-storage site, you have no tenants, so it’s considered a speculative development, and many banks don’t want to make loans for speculative deals in self-storage.”

As reported earlier this week in, MJ Partners just published its latest Self Storage Market Overview, which the firm hopes will assist bankers and investors better understand the trends in the sector. The data show that the top four self-storage REITs all saw revenue increases between 5.3% and 7.7% for the entire year. Furthermore, the NOIs of each company grew as well, ranging from 8.2% to 10.0%.

The researchers also found strong customer demand and robust acquisition activity. Occupancy rates ranged from 89.2% to 93.0% and the publicly-listed REIT Public Storage, the largest storage firm with 2,200 US sites, just this year acquired 121 properties worth $1.16 billion, the majority in the fourth quarter. REITs acquired self-storage properties worth more than $2 billion in 2013, an increase from about $1.5 billion in 2011 and 2012.

However, developers of self-storage properties still find it difficult to obtain financing. “According to F.W. Dodge,” the new report noted, “only approximately 221 facilities nationwide are in various stages of development, equivalent to less than 0.5% of total inventory.”

What many bankers may not understand, Boorstein adds, is that the business has undergone big changes. Many self-storage companies, especially the larger ones like Public Storage, have gotten much more sophisticated and instituted policies and techniques that boost profits and improve stability. After years of testing, for example, many firms have discovered how to schedule periodic increases in users’ rental fees without losing them as customers.

“The renters are staying much longer than anyone anticipated. They typically start off by saying, ‘well, I’ll be here about three months,’ and then they end up staying a year.”

Furthermore, the Internet, and especially the spread of mobile devices, has transformed how prospective customers interact with and choose a storage location.

“New customers are quickly migrating towards mobile devices,” says Spencer Kirk, CEO of Extra Space Storage Inc., a Utah-based REIT that last year purchased 78 properties for $586 million. Mobiles were “used in 25% of our rentals last year, and may be 50% in 2014.”

“The majority of users once chose a self-storage place just by driving by a site and seeing the sign,” says Boorstein. But the convenience of smartphones and other handheld devices means that the operators utilizing Internet search optimization techniques “will capture the lion’s share of the inquiries. And the sophistication of the large-scale players and the thousands of Mom-and-Pop operations is just night and day. ”

That gap has, however, made thousands of self-storage sites into “low-hanging fruit” for investors, since buyers generally have a lot of confidence they can enhance revenue. “That may be one of the reasons that development has slowed down,” Boorstein admits, since the purchasing activity soaks up funds that otherwise could fund new construction. “We’ll have 20 offers on one property.”

Still, he believes the mismatch in skills and resources between the smaller and larger operators should give bankers more confidence to at least lend funds to the latter group for new developments. “But right now, it’s very difficult for lenders to comprehend this sector because there is not one go-to source of information to explain it. I talk to bankers all the time. They call up and say, ‘can you help us understand this?’”