Public Storage CEO Ron Havner said that new supply in the industry is on the way, but it won’t impact their financial performance anytime soon.
“New supply is coming and I believe it will continue to accelerate for all the right reasons,” Havner said during the Glendale, CA-based self-storage REIT’s recent conference call with Wall Street analysts.
According to Havner, the factors supporting new supply include “unbelievably good” operating fundamentals, the ability to build far cheaper than you can buy and the ability to obtain financing.
Havner said as more supply is built, it would have an adverse impact on pricing power—but not just yet.
“I don’t see that being a big negative headwind, at least for another year, but it’s coming,” Havner said.
Gobbling up demand
While developers are gearing up to build new facilities across the U.S., Public Storage has a massive headstart and is reaping the benefits of constrained supply in its development markets.
“The new developments are leasing up much faster than we underwrite,” Havner said.
For example, Public Storage opened a new facility in May 2015 near its corporate headquarters in Glendale, CA with a total of 2,000 units. That facility is already 72 percent occupied, Havner said.
“We underwrote it for a three to three and half year fill up,” Havner said. “That’s filling up at rates pretty close to what we underwrote.”
In some cases Havner said new facilities are leasing up faster because they are offering lower rates and more discounts.
“Once the property stabilizes, we’ll bring the rents closer to market,” Havner said, adding that raising rents to the market price can take about two years.
Public Storage completed three development projects during the quarter, along with an unspecified number of expansion projects, which totaled 300,000 square feet and cost $31 million. The company has a total of 3.4 million square feet of new self-storage facilities in active development that is estimated to cost $417 million, according to its recent third quarter earnings release.
While it hasn’t slowed down their plans, Havner noted that they have seen an uptick in construction costs and more difficulty in finding available contractors.
“Guys are building apartments and hotels and retail, so the construction business is pretty good now,” Havner said.
In addition to building new facilities, Public Storage purchased two self-storage facilities in Colorado during the quarter for $26 million. So far during the fourth quarter the company has purchased or has under contract 11 facilities for $108 million.
Public Storage brought in total revenue of $618.9 million during the third quarter, up 9.8 percent from the same quarter last year. Net income rose 15.6 percent to $341 million during the same period.
Average same-store occupancy was 95.3 percent during the quarter, up from 94.7 percent a year ago.
Same-store rent per occupied square foot climbed to $16.19 during the quarter, compared to $15.27 a year ago.