Self-storage development is considered by some to be the darling of the commercial real estate world right now, but that doesn’t mean some markets aren’t more oversupplied – or undersupplied – than others.
A new report from CBRE sheds some light on which markets are out of equilibrium, one way or the other.
Chris Sonne, CBRE executive vice president-self-storage valuation, says New York is unsurprisingly the nation’s most undersupplied market – followed by San Jose, Los Angeles, San Diego and Baltimore. Some cities, he said, have zoning regulations that make it more difficult to get entitlements to move forward on construction.
Oklahoma City ranks as the nation’s most oversupplied market, followed by Memphis, Columbus, Kansas City and Salt Lake City.
“It’s a time to make really well-thought out, well-researched decisions despite the sector having really performed well over the last four or five years. No one knows what’s going to happen in the future,” Sonne said.
Finishing up the third deck pour at StorQuest, 6th and Kalamath. pic.twitter.com/SeTI40kLGl
— dcb Construction (@dcbConstruction) July 22, 2016
Most markets undersupplied
To come up with the rankings, CBRE considered occupancy, income and cap rate. Of the 38 markets CBRE looked at, 16 fell into the undersupplied category. 11 were oversupplied, and the other 11 were at equilibrium.
Looking beyond the numbers, almost everyone interviewed for this article agreed on one thing: that these numbers be taken with a grain of salt.
In their report, Sonne and co-author Nick Walker, caution that the best analytics for the self-storage sector is by local trade area, which is a three-mile radius around a facility. That means even in an undersupplied market, there can be oversupplied trade areas within the market due to “zoning, overbuilding or demographic trends”.
The reverse is also true, Sonne said. There can be pockets in an oversupplied market where there is demand and not much supply.
“It doesn’t mean that everything is saturated in the city,” he said. “You might still find a neighborhood where there is a lack of self-storage.”
In general, though, Sonne says states like Texas where the business environment is more favorable tend to be oversupplied because it’s simply easier to get approvals for construction. On the flip side, markets like California or New York tend to present more challenges, and have more expensive land. Thus, they tend to fall more in the undersupplied category.
“It’s basic economics 101, with supply in demand in relation to the population,” he said. “But you have to look at all factors such as population, percentage of rents, average household size and income.”
In some markets, it can still be very difficult to get entitlements for storage and financing remains a challenge, Sonne adds.
Pockets of demand
Todd Amsdell, president of Cleveland, Ohio-based Amsdell Companies, says his firm is building in both oversupplied and undersupplied markets.
“Since our footprint and sphere of influence with our customers is much smaller than other real estate products,” he said, “it doesn’t mean that the specific location you are building in is overbuilt even if the overall MSA by some metric has too much square footage per person compared to national averages.”
Amsdell points out that markets like Dallas, which has historically been considered overbuilt, is still seeing a lot of demand.
“More people move into that MSA than just about any other,” he said.
One area of concern for Amsdell is that as developers mature in the development cycle, projects often become larger to justify the increased costs of land and construction.
“This contributes to an overbuild situation in certain markets and/or prolongs other lease-ups or hinders the ability for other operators to grow rents,” he said. “That’s as much of a worry as new projects coming in.”
Impact of expansions
Amsdell also notes that many existing developments are expanding.
“I don’t know we’ve ever seen so many self-storage centers conducting expansions,” he said. “It may not be the brand new facilities that end the party. It might be that too many operators are adding a bit here and there.”
Overall, Amsdell is not too concerned about what’s happening in this development cycle.
“The development game and cycle is about managing expectations and understanding the cycles,” he said. “But a lot of what it is being done is by operators and developers that know what they’re doing. Fear looms when there’s too many builders and flippers that aren’t that experienced in the industry.”
John Good, president of self-storage lender Jernigan Capital, says the company has largely stayed away from Texas with the exception of the Austin area, which seems to be growing.
“It’s a fairly unique submarket,” he said.
And while the company is relatively active in Atlanta, there is concern of oversupply there. Good adds that his company is currently fairly active in Florida in markets such as Miami-Fort Lauderdale, Orlando, Tampa and Jacksonville.
“There’s a lot of developers there with access to capital,” Jernigan Capital chairman and CEO Dean Jernigan – who is the former CEO of CubeSmart – said. “So far, so good but it is a market the gets overbuilt over time.”
In general, the pair note that cities such as Miami, Atlanta, Dallas, Houston, Denver and Phoenix are very pro-growth. To Sonne’s point, zoning is not that difficult in those areas so there is more potential for oversupply.
It's a good time to develop self-storage simply because supply is not meeting demand.
— Dean Jernigan (@deanjernigan) September 7, 2016
Early to the party
Meanwhile, it takes a “special, well-capitalized developer to develop in cities like New York, Washington, D.C, the San Francisco Bay Area and Orange County. – where the entitlement process is very difficult and land expensive,” Jernigan said.
Markets to watch, in his opinion, include Charlotte, Nashville, Austin, Raleigh and Atlanta.
“There’s plenty of population with a lot of affluence and historical shortages,” he said. “Those are really good high-growth markets. We got in early fortunately, and we’ll be getting out because of overheating.”