2015 is a good time to kick off self-storage development, industry experts say

February 9, 2015 0
2015 is a good time to kick off self-storage development, industry experts say

Self-storage development is getting back on track after it practically came to a screeching halt during the recession.

In a report issued last fall, commercial real estate brokerage firm Marcus & Millichap estimated 4.7 million square feet of self-storage space was developed in 2014, up from 3.2 million square feet in 2013. The report indicated that another 11 million square feet was on the drawing board.

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While that’s a far cry from the pre-recession period, when at least 10 million square feet of storage space was built each year, the relative lack of recent construction means pent-up demand—and opportunity.

We’re the busiest we’ve been since the recession hit, by far.
— Caesar Wright, president of Mako Steel

“It absolutely is a good time to build,” said Michael Mele, senior director with Marcus & Millichap’s National Self-Storage Group. “When you look at population growth, rent growth, job growth and storage occupancies being the highest ever—all the economic conditions say that we’re as healthy as can be as an industry, and it’s time to build.”

“However,” Mele added, “we’ve come to see that while everybody is talking about development and has a development ‘in the works,’ because of financing, finding the right sites in the right markets and getting the proper approvals, we think less will be built than meets the eye.”

Mele doesn’t expect a large increase in supply in 2015, but he said more space should be delivered two to three years from now as developers find sites, secure financing and obtain approvals. Typically, he said, it takes a year to finish a ground-up storage project.

Storage REITS are major forces

Michael Mele

Michael Mele says economic conditions are ripe for self-storage development.

The self-storage REITs are driving development, Mele said. They’re doing joint ventures or certificate-of-occupancy deals with local developers, so it “really is an ideal time for local guys to start building,” he said.

(In a certificate-of-occupancy deal, a developer assumes the financial responsibilities when it comes to buying land, securing entitlements and constructing a facility. A REIT then takes over the facility from the developer once it’s completed).

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“What the bigger groups have come to realize is it’s very difficult for them to build in these markets without the local knowledge,” Mele said.

Shawn Hill, principal of self-storage financial advisory firm The BSC Group, said some developers working through certificate-of-occupancy deals are able to gain “more aggressive financing terms” because a REIT is waiting in the wings to buy a new facility.

Storage market is robust

Mako Steel

This January, the team at Mako Steel enjoyed its busiest sales month in 10 years.

Self-storage consultant Jim Chiswell said he’s amazed by how much money is being pumped into the self-storage industry.

“I’m hearing from many of the building companies that they’re having problems keeping up with all the inquiries,” Chiswell said.

One company dealing with a slew of inquiries is self-storage builder Mako Steel.

“We’re the busiest we’ve been since the recession hit, by far,” said Caesar Wright, president of Mako Steel. “January 2015 was our busiest sales month in 10 years.”

In 2014, he said, Mako Steel had more than 100 contracts in place, with about 70 facilities being built. For 2015, the company is projecting 90 to 100 contracts.

Millennials driving apartment growth

Wright said a major factor in this amped-up activity is residential growth. “Storage construction follows residential construction 100 percent,” he said.

apartment for rent

A healthy apartment market is helping propel self-storage construction.

While single-family development is returning, apartment development remains hot in many markets and is helping fuel self-storage development. That’s because renters typically move more often than homeowners do and have less storage at their disposal.

Mele said many apartments are being designed for Millennials wanting to move into cities’ urban cores, and units are getting smaller and smaller. Along the same lines, empty-nesters are leaving their single-family homes and moving into apartments.

Money available to qualified borrowers

Wright said banks have loosened their lending criteria, so financing is a little easier to obtain.

“We see a lot of local banks lending, and if that owner or developer has some horsepower and owns or has owned a facility, they’re more likely to obtain financing than the average Joe who’s trying to get into the business for the first time,” Wright said.

Mele agreed.

“You have to have a track record for building,” he said. “Banks aren’t giving the 90 or 95 percent financing anymore—you have to have 20 to 30 percent of your own money to do it.”

Other economic factors affecting construction include consistently low interest rates along with a boost in consumer spending, meaning people are buying more stuff and will need to store more stuff.

“After hunkering down during the recession, U.S. consumers are clearly back in an accumulation phase, buying new things that will inevitably relegate older possessions to self-storage spaces around the country,” according to the recent Marcus & Millichap report.

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