With rents, occupancies valuations and net opening income at record levels, Public Storage CEO Ron Havner can’t imagine the performance of the self-storage industry getting any better than it is now.
“It’s a hell of a party,” Havner said during his keynote address at the Self-Storage Association Fall Conference and Trade Show in Las Vegas last week.
But parties don’t last forever, and Havner cautioned that sooner or later so to would the current run in the self-storage sector.
“First and foremost the Achilles’ heel of our business, and any business for that matter, is new supply,” Havner said.
Development on deck
Havner said development is the word of the day in the self-storage industry, projecting up to 500 to 600 self storage facilities will be completed in 2016—a total of 30 million square feet.
That is double the 15 million square feet Havner estimates will be completed this year.
In particular, Havner said that developers are looking to secure certificate of occupancy deals with operators. In such deals, referred to as C of O deals, an operator agrees to buy a facility from a developer upon completion of the facility.
“My guess is most of you are here today either to sell your C of O deals, to get money to do C of O deals, to learn how to develop properties or to partner with people developing properties,” Havner said, “Fundamentals are great. The banks are lending, capital is cheap and plentiful, values are high and the public companies are doing C of O deals.”
Follow the leader
Over the last year publicly traded storage companies Extra Space Storage, CubeSmart and Sovran Self Storage have accelerated the number of C of O deals on their books to grow their portfolios.
“If I were a developer I would be building as much as I could, as fast as I could,” Havner said.
True to his word, Public Storage is not only the world’s biggest storage operator, but is currently the industry’s most prolific developer with about 60 facilities in its pipeline. Havner said the company is growing most rapidly in the Texas markets of Dallas and Houston.
“Overtime you will see us put between 50 to 100 properties in those markets,” Havner said.
Before the party ends
The flood of new supply, coupled with higher interest rates and reduced liquidity, will at some point bring the current cycle of record growth in the industry to an end, Havner said.
“Eventually that new supply will impact revenue, and it will impact NOI growth rates and valuations will back off,” Havner said. “Throw in a little lower liquidity and slightly higher interest rates and maybe we are coming close to the peak.”
Havner said for public companies like his, as well as companies sponsored by private equity and companies with plans to go public, now is the time to buy as many assets as possible.
“It is a little like a hot dog eating contest; choke down as much as you can, as fast as you can,” Havner said.
For private owners with a short time window, or with partnership or family issues, now is the time to sell while valuations are still high.
As for long-term holders, Havner said: “Just relax and enjoy the party, sooner or later it will end.”