It appears that competition from new self-storage development is having an impact on Public Storage’s bottom-line—at least in a few select markets.

During the company’s second quarter conference call, CEO Ron Havner singled out two markets in particular: Denver and Houston, which saw revenues decline 8.3 percent and 6.6 percent, respectively, during the second quarter.

Havner said occupancy also declined in those markets by 150 to 200 basis points.

“There is a fair amount of new supply in those markets, we have number of properties there to fill up,” Havner said.

A self-storage construction site in Loveland, CO--part of a market where Public Storage is feeling the impact of new supply.
A self-storage construction site in Loveland, CO–part of a market where Public Storage is feeling the impact of new supply.

A long time coming

Havner also attributed some of the decline in Houston to a general economic slowdown there.

Havner also pointed to Washington D.C., Chicago, West Palm Beach, FL and even New York City as experience some softness due to the amount of new development coming online in those locations.

“I have been saying for a year or two that new supply will definitely impact revenue growth, and certainly, in markets like Denver and New York, it is impacting to some degree our revenue growth,” Havner said.

However, those declines are balanced out by strong performance in other markets, in particularly San Francisco, Los Angeles and Seattle. Havner said they are seeing an absence of new supply in those markets, where barriers to development are stronger.

Nationwide, Havner estimates that there has been a 20 percent uptick in the volume of new supply over the last 12 months.

Eye on future growth

Meanwhile, Public Storage continues to expand its own development pipeline.

Public Storage completed the development of seven new facilities during the second quarter. Along with various expansion projects that added a million square feet of rentable space, the company spent about $116 million on new development during the quarter.

One such project is its recently opened store in Irvine, CA (pictured at top), which is the company’s second-largest facility with more than 3,000 units.

The staff of Public Storage's newest location in Irvine, CA are ready to work.
The staff of Public Storage’s newest location in Irvine, CA are ready to work.

The company has about $631 million worth of new development and expansion in its pipeline, which will add another five million square feet of rentable space to the company’s portfolio.

“We continue to develop. We see attractive yields; in some markets, just there is some cannibalizations,” Havner said, “[We are] very focused in terms of developing where we don’t have existing product.”

Havner said the pay off from new development will come down the road once those facilities are full and rate increases start to take hold starting in 2018 and beyond.

“It’s a great investment long term,” Havner said, “It is a bit of a headwind on earnings today, but a great source of future growth,” Havner said.

Overall performance

Same-store revenue grew 6 percent during the quarter, while net income from same-store locations grew about 6.6 percent.

Same-store occupancy ticked down slightly from 95.4 percent last year to 95.3 percent during the second quarter.

Realized rent per occupied square foot ticked up 6.1 percent compared to last year at Public Storage’s same-store locations, which amounted to $16.39 per square foot during the most recent quarter.

Total revenue for the second quarter totaled $634 million, up about 7.7 percent compared to last year. Net income totaled $358 million, an increase of 9 percent.

Rate increases continue

Facing softer demand and flattening occupancy in some markets, Public Storage continues to find new revenue from a familiar source: existing tenants.

“We’re still pushing…renewal rates to existing tenants,” said CFO John Reyes. “Obviously we are watching to see if that is triggering any ramp up in move out activity, so far it hasn’t,” Reyes said.

Renewal increases are typically between 8 percent and 10 percent, he said.

As for generating demand from new customers, Eyes said the company will continue to cut move in rates and increase discounts until it reaches “an equilibrium” they are happy with.

As a result, move in rental rates were down on average about 2.5 percent in July compared to last year, Reyes said. That varies widely market to market. For example rents in Seattle are up more than 6 percent while rates in Houston are down about 5 percent, Reyes estimated.

“We are afraid to cut rates,” Reyes said, “We will go right after market share.”

Alexander Harris