Inside Self-Storage

SEP 2018

Inside Self-Storage (ISS) is an information source for industry owners, managers, developers and investors covering news, trends, facility operation, finance, real estate, construction, development, marketing, technology, insurance and legality.

Issue link: http://digital.insideselfstorage.com/i/1008353

Contents of this Issue

Navigation

Page 25 of 63

"If you build a massive site all at once, you minimize the amount of time spent dealing with the design and permitting process. On paper, this looks good," Hajewski says. "The problem with developing these properties is that they can take longer to reach their break-even occupancy." What Is Saturated, Really? So, when is a market saturated? "Simply stated, it's when the market can't absorb all the existing storage supply to an acceptable level of occupancy," Burkhart says. When this happens, operators can expect a softening in occupancy and rental rates as more facilities fight for the same pool of customers. "The impact to the existing operator isn't as substantial because a certain portion of their tenants are long-term," Burkhart says. "For the new operator, it may mean undercutting market rents to drive lease-up and navigating a longer lease-up period. This typically means larger cash-flow shortfalls during the riskiest part of investment: from zero percent to 60 percent or 70 percent occupancy when all the bills and all the debt is covered." The effects can be viewed differently depending on one's perspective. "We are finding today that many new self-storage owners feel a market is overbuilt when the submarket's occupancies are below 88 percent," Vestal says. "This is largely due to the fact that they have underwritten the market to a 90 percent or better occupancy." As a builder, Loeb is realistic about lease-up for SurePoint's new locations, considering them stabilized at 85 percent. "We do not allow ourselves the luxury of thinking 90-plus percent is the norm," he says. Established and larger operators, including the REITs, have been able to drive occupancy but might be realizing lower rental rates. When a quality property can't achieve or maintain a profitable occupancy without significant discounting, it's a clear sign there's too much supply, Hajewski says. "When you see a three-year-old property at 60 percent occupancy, that market is overbuilt." While some will rely on national benchmarks to determine how much storage an area can absorb, these numbers aren't accurate for every market. "What reflects the status of supply and demand is rental rates and occupancy. We can infer some things about future demand based on projected growth; but there are markets with 4 square feet per person that are overbuilt, and some with 20 square feet per person that need more," Burkhart says. "Data and analysis from specific micro-markets matters most when making investment decisions, not national averages." The fact is there's no magic number to indicate saturation. "A holistic approach to evaluating markets and submarkets must be taken to fully understand the local dynamics of the self-storage industry," Hawkins says. "To get the clearest picture, we need to evaluate our submarkets, with an emphasis on the unique demographics that characterize each." Mitigating the Impact As the self-storage industry continues to grow, it's imperative to build responsibly. Constructing too much too fast or selecting a poor site in a busy market could lead to weak lease-up for new projects and depress rental rates for all. "There are markets that are certainly heading in the direction of overbuilding or are in fact overbuilt," says Gary Cardamone, CEO and owner of Nuvo Development LLC, which offers architecture, development and engineering services to the storage industry. "Our strong suggestion would be for developers to have a professional market study completed prior to deciding to develop." Facility developers and owners should establish their own set of building principles. "Set them, challenge them and stick with them," says Cardamone. If something in the market changes, such as an increase in material costs, a long entitlement period or even a moratorium, you'll have a plan. Also, remember that not all storage is equal. Consider what new products and services you can bring to a community. "We look at the market in terms of product. If we feel there are certain products, like indoor storage, that haven't been served, we will build," Osborne says. "But we do not build for the sake of building, and do not believe in the 'If you build it they will come' approach." Finally, pay attention to the facts. "Accurate data is the critical factor in gaining a deeper understanding of the local nature of the self-storage industry," Hawkins says. "It's essential to analyze supply, pipeline, performance and demographic data together to get a better understanding of the local dynamics of the self-storage industry and to make the appropriate business decisions. From data, we can appreciate how certain areas are riper for self-storage development, while others may be oversaturated." While the quality and quantity of industry data has improved drastically in recent years, it's still behind that of other real estate sectors. "This improvement in industry information has, in a lot of ways, spurred the recent self-storage development boom and created a lot of interest from new, more mainstream developers and investors," Vestal says. However, because collection is difficult and fragmented, there are gaps, which can lead to misinformation and guesswork. "This lack of accuracy and industry nuances have led many very sophisticated developers and investors who are accustomed to receiving very accurate market information to believe that a submarket is under or oversupplied," Vestal says. "It'll take time and, most likely, two to three real estate cycles; but the industry is taking great strides to provide the best possible information to the overall market." In the end, potential overbuilding is just part of the growing pains a real estate sector must endure as it matures. "The improvement of market-specific industry information is the only way to control growth and avoid overbuilding," Vestal says, "but there will undoubtedly be some bumps along the road." As the self-storage industry continues to grow, it's imperative to build responsibly. Constructing too much too fast or selecting a poor site in a busy market could lead to weak lease-up for new projects and depress rental rates for all. 24 ISS I September 2018 www.insideselfstorage.com

Articles in this issue

Links on this page

Archives of this issue

view archives of Inside Self-Storage - SEP 2018