CHICAGO—The self-storage industry has had a remarkable run over the past five years. The major REITs, for example, have grown consistently and recorded rising occupancy and rental rates. Furthermore, operators have begun to apply more advanced analytics and learned how to time rental rate increases and retain tenants, among other strategies, giving a big boost to revenue per-square-foot.
But for much of that time, new development was scarce, at least compared to the level of acquisition activity. Things may be changing. Public Storage, the biggest REIT, now has 28 facilities under development and about $240 million in capital deployment, which it may soon increase to between $300 and $350 million.
The changing landscape will be a big topic of discussion at Inside Self Storage’s Executives and Investor’s Summit/Developer’s Conference, which will be held in Chicago on September 23rd and the 24th. GlobeSt.com spoke to Jim Chiswell, a speaker at the conference and president of Virginia-based Chiswell & Associates LLC, about where the industry now stands.
For years many self-storage developers have been purchasing and renovating facilities instead of starting new development. Is this beginning to change?
The pace of new construction is off the charts positive in comparison to the past 5 years. This is a direct result of two factors: 1) low interest rates and 2) the outstanding performance of the self-storage REITs during the recession. Doing due diligence homework on a new project is more critical than ever due to the level of competition in many markets.
How has this industry evolved in the past 5 years?
The most important change in the industry is probably the enhancement of management and marketing by the implementation of new technologies. And the large public and strong regional companies have continued to acquire existing facilities leading to a great deal of industry consolidation.
However, more facilities are being built than are being acquired. Therefore, the industry continues to grow, with most facilities being built by entrepreneurs. Self storage is still one of the best entrepreneurial small businesses in the world with the lowest gross revenue to payroll ratio of almost any business.
The self storage industry generated approximately $24 billion in revenues in 2013. It has been getting positive press in the financial media. The self storage REITs have been the number one or two real estate REITs asset for the past five years.
Why is this industry so hot right now? What specifically is driving the investors?
Banks have realized the long term potential of the industry is a solid risk so borrowing money for an acquisition and most recently new construction has become easier making interest in the industry a “hot spot.”
There are very few other types of real estate projects that once constructed and fully occupied that will be worth two or three times in valuation versus the cost of building.