CHICAGO—The nation's largest self-storage REITs continue to rackup impressive gains in revenue and occupancy, according to thelatest overview of the industry just published by MJPartners, a Chicago-based firm. But this remarkable run ofgood news has still not kicked off a commensurate level of newconstruction, and the implied cap rates for these properties haveyet again sunk to historic lows.

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“On average, the cap rates for properties in the best locationshave 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 tobe coming to an end. I meet a new private equity group consideringself-storage at least once a week. It's amazing and investors wantin.”

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

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Occupancy levels for the big four have hit near all-timerecords. As of July 31, Public Storage rented out 94.8% of itsspace, up from 94.0% one year ago. Extra Space, which has more than1,000 locations, had a rate of 92.4%, versus 90.8% last year. Andthe rates for CubeSmart and Sovran, each with 500 or morelocations, went from 90.1% and 88.3%, respectively, to 92.4% and91.0%.

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

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But for a sector awash in so much revenue, new product remainsremarkably scarce. According to Boorstein, the development processremains time-consuming and lenders have not gotten completelycomfortable with self-storage. “It's a retail business thatoperates in areas that frequently have industrial zoning,” he says,“so you are limited in the number of good in-fill sites. It takessix months just to find a site.”

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

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Typically, the big four have expanded by purchasing smalleroperators. Public Storage, for example, has acquired 127 facilitiessince January 2013. On July 1st, for example, it acquired 25properties, mostly in Florida, containing 1.8-million-square-feetfor about $240 million in cash. And the company currently has fouradditional properties in Virginia and the Carolinas with374,000-square-feet under contract for a price of about $40million.

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

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“They are definitely ramping up development. For a $30 billioncompany, it barely moves the needle, but at least it's notzero.”

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Brian J. Rogal

Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.