Chris Jernigan: The new dynamics of self-storage development

September 22, 2015 1
Chris Jernigan: The new dynamics of self-storage development

A version of this article originally appeared on ListSelfStorage.com

The self-storage industry is currently in the beginning stages of an unprecedented development cycle for the sector. For many years, new construction starts of self-storage facilities in the United States has fallen behind population growth. From 2010 to 2014, only 300 facilities were built in the 50 largest metro areas. In fact, to match population trends, approximately 2,000 facilities should have been built in that time period in those markets.

This deficit will result in a development cycle that will last well beyond the length of a typical cycle. We are anticipating this cycle lasting up to five to seven years. According to estimates, the industry should build roughly 3,500 facilities over the next five years in the largest markets to catch up with population growth and keep current with additional population trends. It is anticipated that roughly 150-200 facilities will be completed in those markets this year and up to 400 will be completed next year.

With this deficit, it is probable that the industry will continue to lag yearly self-storage demand. This pent-up demand explains why the industry is seeing tremendous occupancy and rent growth. There are few markets (if any) where supply of self-storage currently exceeds demand. It is clear that there is tremendous opportunity available for the entrepreneurial self-storage developer in this long development cycle.

What trends are we seeing this development cycle?

Information

Information

There is no doubt that we live in an age of Google Earth, advanced mapping programs and demographics available to be sliced and diced as fast as we can bring them up on our computers. With this development cycle, self-storage development meets the information age. Understandably, self-storage developers across the country in markets large, small and everything in between are taking advantage of the wealth of information available to assist in developing our product.

While the massive amounts of information are great, be leery of “paralysis by analysis” or “over thinking” every nuance of every situation. We will continue to improve the efficiency in how we use information in our sector as this cycle matures.

Apartments

Apartments

The United States homeownership rate peaked at 69.2 percent in June 2004 and dropped to a 20-year low of 64.5 percent in 2014. Two main factors have led to this decline: Americans are deferring marriage to a later age and the home is no longer seen as an infallible asset class since the 2008 mortgage crisis.

Many are saying that the multifamily market has never seen a better set of future demographics. This means that a higher percentage of Americans will be living in smaller living spaces with a greater ease of movement around the country. These factors bode well for self-storage. Find a market with strong multifamily construction starts and you have most likely found a good place to develop self-storage.

Location

Location

Of course location has always been the paramount decision for a self-storage developer. Has that changed? No, it has not, but there is a twist in this development cycle.

In fact, let’s call it “location with a twist”. Location with a twist says you don’t have to be at “main and main.” In fact, you don’t have to be “just off main and main.” Focus on a parcel for development that is in a great submarket with great demographics. In the age of GPS, the customers in a great submarket will find you, even if you are figuratively (or literally) by the “railroad tracks”. Sites that we would have scoffed at 20 or even 10 years ago have become great sites now because self-storage has become a destination. This trend has opened up many great sites that are affordable and more likely to get entitled.

Vertical

Vertical

Lastly, during this development cycle the vertical self-storage building will rise in prominence in medium-sized and larger markets. Sure, there will always be a place for the traditional self-storage product BUT vertical buildings will become the norm in more highly dense, higher rate submarkets. A large majority of the deals currently in the pipeline in those markets are vertical building deals. The response to these buildings, from consumers paying higher rates and zoning boards approving more sites, means this trend will continue throughout this development cycle. This is another positive for our business and a trend to keep an eye on.

In conclusion, there is no doubt that it is a fantastic time to be in the self-storage business and a fantastic time to be developing self-storage. It will be interesting to watch these and other trends continue to develop over the years of this development cycle.

If these bullish trends continue (and they will), we will look back at this development cycle as the greatest of our lifetime. We should all be excited to participate and see it all unfold!

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