Over the last year industry buzz around self-storage development has gone from a whisper to a shout, but how long until it roars?
CEOs of the country’s two largest operators recently offered contrasting views of the current state of self-storage development during their quarterly conference calls with Wall Street analysts.
Public Storage CEO Ron Havner told analysts that more development activity was taking place “than most people realize” and that executives at the company were “surprised at the number of markets where we are starting to see development.”
Most of what we are seeing is very early in the planning stage today
-Michael Mele, senior vice president of investments at Marcus & Millichap
Meanwhile Extra Space CEO Spencer Kirk told analysts during his company’s conference that he believes “supply is coming…but it needs to be kept in perspective.” Kirk estimates that 300 to 500 facilities are under construction now in the U.S., about 100 of which are being built for the REITs.
The two companies are also taking two different approaches to adding their own new facilities. Public Storage is developing new facilities in-house and has about 25 planned across the country. Extra Space on the other hands is buying facilities from private developers upon completion, with 13 such facilities in its pipeline.
By the Numbers
While somewhat conflicting, the viewpoints of both CEOs appear to be valid. Self-storage construction companies and manufacturers told the SpareFoot Storage Beat that they are busier than they have been in years.
Construction spending on self-storage facilities as reported by the U.S. Census Bureau increased more than 27 percent in 2014 over the previous year with $591 million in spending reported. The census figures include spending on renovations and expansion as well as new construction.
Already in January, construction spending on self-storage facilities is up 34 percent compared to the same month last year.
However, the recent rise in self-storage construction activity is far from approaching the period between 2000 and 2008 where an average $1.1 billion was spent each year and many proposed self-storage projects won’t actually be completed for at least another year or more.
Calm Before the Storm?
A recent self-storage research report by Marcus and Millichap forecasts that 2015 will see a decline in deliveries of new self-storage space compared to 2014 and described the current level of construction activity as “anemic”.
The report anticipates the completion of 4.4 million square feet of new self-storage space this year, compared to 5.2 million square feet that was added in 2014
About 3 million square feet of projects are currently under construction, the report said. A huge chunk of that, 600,000 square feet, is being built in New York City.
The report states that while there is plenty of demand to support new facilities, developers face many challenges getting projects to fruition.
“Competition for development sites is fierce, with multifamily builders in the midst of a building boom that is pushing up land prices and shutting out self-storage developers,” the reported stated.
However, the report says that conditions are likely to change next year: “While limited now, construction will eventually rise and exert greater pressure on property performance, perhaps as soon as late 2016.”
Early Planning Stages
Michael Mele, principal of the Mele Group and member of Marcus & Millichap’s Self Storage Group, said that he expects between 700 and 1000 facilities to start construction over the next three years, with most of those facilities being completed in 2016 and 2017.
“Most of what we are seeing is very early in the planning stage today,” Mele said.
One reason that the current development cycle is unable to rise to its former heights is that many proposed projects are impaired by financing or entitlement issues, Mele said. Mele said the bulk of storage development comes from local developers who rely on bank financing to build projects. Unfortunately for them obtaining a loan is still not as easy as it once was.
“Suddenly they have to put 20 to 40 percent down instead of 5 to 10 percent and it makes things a lot more difficult,” Mele said.
Developers often encounter problems getting entitlements because self-storage does not generate as many jobs as other commercial uses and not as much property tax income as residential uses.
Those factors, as well as the difficulty of finding suitable sites, are putting a damper on some who are looking to develop facilities.
“Frankly most of the markets in the country, when you look at what it costs to build versus to buy, the rental rates aren’t high enough for new construction. It is hard to build one that makes economic sense for the amount of risk involved,” Mele said.
The exception to that case is in major cities with higher rental rates and higher barriers to entry such as New York, Los Angeles, Miami and Dallas.
While many obstacles are keeping a massive surge at bay, enough new development is taking place to stimulate the building and manufacturing industries.
Douglasville, GA-based rollup door manufacturer DBCI recently hired two new account managers and created roles for a new estimator and a new support clerk in order to respond to “the booming self-storage industry and an increasing demand for DBCI products,” according to TJ Kuehn, marketing brand manager at DBCI.
Leeann Fleming, marketing manager for self-storage manufacturer Janus International, said they the company has also grown to keep up with rising demand.
“Each department has grown over the last couple years,” Fleming said. “Internally we are growing to support all of our external growth.”
Heath Mulkey, president of Villa Rica, GA-based builder Storage Structures Inc., said he has hired additional office staff and construction crew members to keep up with demand.
“There are a lot of new people who are hearing how the storage industry has fared, so there are a lot of guys coming into the business that were in apartments, retail and office,” Mulkey said.
During the recent slow down in self-storage construction Mulkey said that his company pursued jobs in Latin America including in Panama, Chile and Puerto Rico.
“Now we are just doing jobs back in the states because demand has picked up all across the country,” Mulkey said.
Follow the Rooftops
Caesar Wright, president of Carlsbad, CA-based builder Mako Steel, said that his company is as busy as it has been since 2005.
“We have seen a tremendous amount of activity. Last summer is when it really started to pick up,” Wright said.
Wright said this past January and February have been the busiest two months for sales that the company has seen in the last 10 years. Wright said the firm has 87 jobs in its pipeline in various stages of development, the bulk of which are for mom and pop operators. About 50 percent to 60 percent of the company’s current pipeline projects are expansions of existing facilities, Wright said.
Wright said the resurgence of residential development is a major driving force for the recent uptick in self-storage development.
“When homes and apartments are being built, that’s a good thing for us,” Wright said, “Where there are rooftops, there is storage.”