Self-storage new construction continued its slow but steady recovery through the early spring, due to a strong demand for storage and growing confidence among developers that certain markets still need more supply.
The amount of new supply potentially coming on line isn’t anywhere near pre-pandemic levels. In fact, it may take a few more years for the development sector to recover from the COVID-19 crisis that shook the economy and briefly dried up financing for many self-storage projects, according to a new Yardi Matrix report.
Still, self-storage properties under construction or in the planning stages across the U.S. in April accounted for 8.3 percent of existing inventory, up from 8.2 percent in March, according to Yardi Matrix.
A post-pandemic surge in storage development?
That’s certainly not a huge jump by pre-pandemic standards, but Yardi Matrix notes that each of its forecast updates since the pandemic began last year has shown slight increases in its long-term new-supply projections.
“While we expect self-storage to maintain its positive momentum, the industry may face more supply headwinds over the longer term as developer interest in the asset type continues to grow,” Yardi Matrix adds in its report, anticipating an eventual post-pandemic surge in new-supply activity.
Chris Nebenzahl, editorial director at Yardi Matrix, said there’s a simple explanation for the longer-term supply outlook. “The industry is just on fire,” he said. “There’s been a huge, huge increase in the demand for storage space.”
And that huge demand has led to higher street rates – and the higher street rates are enticing some to get back into the development game.
Ready, set, go
“Developers are starting to say, ‘Hey, let’s push forward with this project. Things are getting a little better,’” says Nebenzahl.
Sean Delaney, senior vice president at Marcus & Millichap, says the market fundamentals are there for some projects to proceed.
“It’s not surprising,” he says of the slight uptick in new-construction activity in general. “Deliveries tapered off due to the pandemic, but they’re starting to come back.”
According to the recent Yardi Matrix report, New York has the highest number of facilities in the construction or planning stages, with new supplies accounting for 17.5 percent of existing inventory in the Empire State. That’s up from 17.4 percent in March.
Sacramento has the second highest level of facilities in the construction or planning pipeline, at 14.6 percent of existing stock, up from 13 percent in March. Philadelphia and Phoenix also have large supply pipelines – and their supply projections were up slightly in April.
Indeed, every major metro market tracked by Yardi Matrix, with the exception of Las Vegas, shows either small increases in new supply growth or flat supply projections.
Some of the new supply, at least those in the planning stages, appears to be driven by so-called “new capital” coming into the market, via institutional players and others who have recently taken note of the sector’s strong performance during the current economic downturn, according to both Nebenzahl and Delaney.
The high cost of building
But a huge challenge for developers is the cost of construction these days, as prices for both materials and labor surge.
Products heavily used by self-storage developers are up substantially year-over-year, such as steel-mill products (40 percent), copper and brass (44 percent) and plastic construction products (10.4 percent), according to recent data from the Associated General Contractors of America.
Those cost increases could cut into spreads for eventual operators of new self-storage facilities, making some nervous about proceeding with projects.
Despite such headwinds, Nebenzahl and Delaney said they’re confident new construction will pick up relatively soon, due to high demand and strong rental rates.
“If owners are patient and hold on to (newly built properties) for a while, they’ll get good returns,” Delaney says.