A newly-developed storage site at 325 W. Ohio in Chicago

CHICAGO—The nation’s largest self-storage REITs continue to rack up impressive gains in revenue and occupancy, according to the latest overview of the industry just published by MJ Partners, a Chicago-based firm. But this remarkable run of good news has still not kicked off a commensurate level of new construction, and the implied cap rates for these properties have yet again sunk to historic lows.

“On average, the cap rates for properties in the best locations have declined 25 bps in just the last 90 days,” Marc A. Boorstein, a principal of MJ Partners, tells GlobeSt.com. “You’ve got low risk and great returns. And that does not appear to be coming to an end. I meet a new private equity group considering self-storage at least once a week. It’s amazing and investors want in.”

The publicly-listed REIT Public Storage, the largest storage firm with 2,200 US sites, had an implied cap rate of just 4.3%. Rates for Extra Space Storage, CubeSmart and Sovran Self-Storage, the other major operators, were between 4.9% and 6.2%.

Occupancy levels for the big four have hit near all-time records. As of July 31, Public Storage rented out 94.8% of its space, up from 94.0% one year ago. Extra Space, which has more than 1,000 locations, had a rate of 92.4%, versus 90.8% last year. And the rates for CubeSmart and Sovran, each with 500 or more locations, went from 90.1% and 88.3%, respectively, to 92.4% and 91.0%.

Revenue increases have followed, and ranged from 5.3% to 8.6% higher than the second quarter of 2013. Net operating income increases ranged from 6.9% to 10.0%.

But for a sector awash in so much revenue, new product remains remarkably scarce. According to Boorstein, the development process remains time-consuming and lenders have not gotten completely comfortable with self-storage. “It’s a retail business that operates in areas that frequently have industrial zoning,” he says, “so you are limited in the number of good in-fill sites. It takes six months just to find a site.”

And once developers select a site, financing becomes the next hurdle. Whatever the occupancy levels in existing product, bankers still consider each new development, all of which open with zero occupancy, a speculative project, Boorstein says. Therefore, instead of establishing funds that could finance giant blocks of development in multiple markets, bankers approach self-storage on a deal-by-deal basis, further slowing down new construction. “That should continue for at least several more years.”

Typically, the big four have expanded by purchasing smaller operators. Public Storage, for example, has acquired 127 facilities since January 2013. On July 1st, for example, it acquired 25 properties, mostly in Florida, containing 1.8-million-square-feet for about $240 million in cash. And the company currently has four additional properties in Virginia and the Carolinas with 374,000-square-feet under contract for a price of about $40 million.

However, things on the development front may have changed, if only slightly so far. Boorstein points out that Public Storage currently has 28 properties in various stages of development with capital deployment currently at about $240 million. Furthermore, the company is looking at a host of potential new sites in key markets, and could increase capital deployment to between $300 and $350 million.

“They are definitely ramping up development. For a $30 billion company, it barely moves the needle, but at least it’s not zero.”