CHICAGO—A lot of capital is sloshing around the US real estate market, but none of the hot sectors has such a mismatch between new supply and existing demand than self-storage.
In the third quarter, the major self-storage companies retained near-historic levels of occupancy, accompanied by steep revenue growth and strong increases in net operating income, according to a new report by MJ Partners Real Estate Services, a Chicago-based firm. But developers today only complete facilities at roughly 20% to 30% of the rate seen in the mid-2000s, when they added more than 2,600 facilities per year to the marketplace.
"That has definitely led to a rush of acquisitions of existing facilities," Marc Boorstein, a principal of MJ Partners, tells GlobeSt.com. "We always say, 'when will it slow down?' We think it will slow down when there is a great deal of new development, but for now that is not in sight."
MJ Partners' quarterly report focuses on the largest REITs in the self-storage world. In the third quarter, all hovered at or near historic levels of occupancy. Just a few years ago these operators usually had occupancy rates of about 85%, but Public Storage, which now has 2,266 sites in the US and more than 200 in Europe, now has an occupancy rate of 95.3%, up from 94.7% one year ago. Extra Space Storage, with 1,335 sites the second largest, had a rate of 93.6%, compared to 91.7% last year. And revenue among the big four public companies grew between 6.5% and 10% when compared to the third quarter of 2014.
One of the things that Boorstein finds most exciting about the industry is that even with the recent leaps in revenue and occupancy, a lot of room for growth remains. The self-storage industry still has many thousands of Mom-and-Pop outfits that, no matter how well-located or well-run, find it difficult to push occupancies and revenue up as high as their bigger counterparts. This makes them ripe for acquisitions, after which the new owners can use their greater financial wherewithal to bring in technology that tracks customers better and retains their business longer, sometimes at significantly higher rents.
"When we sell a property at a 5.0% cap rate, no one thinks it's going to stay a five," Boorstein says. The buyers simply expect that by using the right kind of tracking software, among other techniques, they can boost revenues and improve on the investments.
"The whole business model has changed so quickly," he adds. For example, Extra Space Storage just reported that more than 50% of its rental demand now comes from customers who engage the company through mobile devices, up from 30% one year ago. "This has happened so much faster than we thought. It means that operators are going to have to invest more in technology. The ones with the best placement on internet searches in each of the submarkets where they have facilities are going to win the customers."
"I'm asked all the time by investors if I think that self-storage has reached its peak. And I always say, 'no, we've got a lot of runway here.'"
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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.
