CALABASAS, CA-The self-storage sector is poised for further growth, with a combination of household formation, job growth and increased population mobility lifting demand, Marcus & Millichap Real Estate Investment Services says in a new report. At the same time, new supply to meet the demand has yet to materialize, giving owners a free hand with rental rates.
Demand drivers vary from region to region, but it’s safe to say that the drivers are in place pretty much everywhere. “On the East Coast, migration is stimulated by above-average employment markets, including New York City and Charlotte,” says MMI’s Richard Bird, VP and general manager. “These traditional financial centers are diversifying with technology and housing-related segments adding thousands of positions, attracting job seekers from areas where job growth is slower.”
In Texas and other energy states, job formation is being spurred by oil and gas exploration, and workers are lured to these markets by high wages. “Many of the newly employed are housed in barracks or small apartments, creating demand for self-storage units for additional space,” according to Bird.
Another hub of job creation is the tech-heavy markets of the Bay Area and Seattle are drawing workers to fill open positions. Housing prices in those markets are some of the highest in the US, while apartments run to the smaller side, “leaving self-storage units as valuable extra space,” according to MMI’s report. In the Sun Belt, a recovering housing market is behind the demand: “As retirees sell their homes in the Northeast and Midwest, they are increasingly tapping storage units in destination cities to temporarily hold household items.”
New supply, meanwhile, hasn’t kept pace with usage growth, with just 11.4 million square feet coming on line since 2010, MMI says. However, 2013′s construction tally of three million square feet was nearly double that of the year prior. About one-quarter of that was built in Texas, followed by Colorado with about 400,000 square feet.
This year, self-storage developers will add 1.7 million square feet at 21 facilities to the national inventory. Four of the largest facilities will be located in Houston; Charleston, SC; the Long Island City section of Queens, NY; and Tacoma, WA.
On the investment sales front, MMI reports that the median price for self-storage assets increased 11% last year to $73 per square foot, led by the West at $80 per square foot, a 22%increase year over year. Cap rates have compressed slightly in the past year, averaging in the low 7% range.
In a recent interview with REIT.com, Spencer Kirk, CEO of Cottonwood Heights, UT-based Extra Space Storage, one of four public US REITs specializing in self-storage, spoke to investor demand for these assets. “There’s a lot of competition for these assets,” he told REIT.com. “People like self-storage.”
With the top 10 self-storage operators “owning, controlling or operating less than 10% of the market, we’ve got a very fragmented environment, and I think that although there’s some pricing competition that’s a little stiffer than we would like, the landscape for a number of transactions for financial consolidation appears to be wide open,” Kirk continued. “I actually think we’ll see an acceleration in the acquisitions market.” EXR’s largest competitor among REITs, Glendale, CA-based Public Storage, operates more than 142 million square feet at 2,200 facilities across the US and Europe.
Helping spur the acceleration Kirk cited, MMI predicts, will be a decrease in prices as interest rates rise and buyers require lower values to meet their yield requirements. “New listings will be met with plenty of buyer demand as capital awaits quality properties,” according to MMI.