2018 Self-Storage Investment Forecast

by John Chang

Nationally, the self-storage industry is entering a period of maturity as supply-side pressure begins to impact fundamentals. Underlying demand for storage space remains strong; however, aggressive development activity over the past two years is starting to overtake absorption. Moving forward, nationwide vacancy and rent growth may soften amid greater competition, particularly in construction-heavy metros.

The retirement and downsizing of baby boomers coupled with the continued emergence of millennials will support the need for self-storage space in the coming years. This demand will only strengthen as these generational forces unfold, providing a positive long-term tailwind for the market.

The strength of the apartment market could positively impact self-storage demand as the smaller average residence size offered by rentals encourages the use of storage space. Furthermore, strong small-business optimism may underpin additional commercial usage as lower tax obligations and high expectations about the future of the economy incentivize expansion.

The major self-storage REITs have become more conservative on the acquisition front amid growing industry headwinds. While high-end properties in quality locations will still be actively pursued, REITs may shift their focus to expanding their third-party management business. Management partnerships with existing private owners and new development has been an effective strategy used by REITs to control more assets while avoiding direct upfront purchase.

Self-storage financing remains available; however, underwriting standards are tightening in the face of oversupply risk, lower revenue growth expectations and greater regulation. Construction loans will be especially scrutinized as lenders continue to show resistance to suboptimal deals and inexperienced sponsors.

Phoenix, as a top metro for self-storage construction last year, welcomes a reduced volume of space in 2018, yet deliveries still exceeds 800,000 square feet. The completion of roughly 300,000 square feet in and around Scottsdale steers this year’s finalizations. Inventory stands at 28 million square feet and 5.7 square feet per capita.

The metro absorbs a wave of new supply for a fourth consecutive year, slightly reducing vacancy to a 7.4 percent, a five-year low rate. Consistent demand for storage units stems from continued population growth, allowing operators to increase the average rent by nearly 6 percent following a double-digit gain in 2017.

John Chang is first vice president, national director of Marcus & Millichap Research Services.

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