The self-storage industry is entering a cool off period and new development could hit small entrepreneurs in the years to come, according to Dean Jernigan, CEO of Jernigan Capital.

“It is not going to be good for small entrepreneurs with this new supply coming, no question,” Jernigan said during the company’s third quarter earnings call.

The publicly-traded investment firm is a lender to developers building new self-storage facilities.

Deja vu

Over the next two to three years, Jernigan expects the self-storage industry to be in a similar situation that it was in 2009, during the thick of the last recession.

“2009 was a year we suffered negative top line growth and negative NOI growth,” Jernigan said.

Discretionary customers dried up in the wake of the recession, which quickly created an industry-wide overcapacity of between 10 to 12 percent, Jernigan said. Overbuilding is poised to create a similar capacity scenario, and new supply will hit operators in certain markets especially hard.

“We’re going to have some markets that are overbuilt, terribly overbuilt, and some will have a hard landing,” Jernigan said, pointing to the large Texas cities as being the most overbuilt today, “Austin for certain is headed for a crash landing.”

Below average growth

Jernigan expects growth in the sector to fall below the average growth rates experienced during the last 20 years—4.5 percent revenue growth and 5.5 percent NOI growth—before reverting back to the mean.

“We will go below that for the whole sector,” Jernigan said.

But Jernigan does not expect negative growth. For the most part, Jernigan expects the major industry REITs to weather the coming storm just as they did during the previous slow down. Street rates dropped only five percent and occupancy generally fell just three percent for the REITs, Jernigan said.

“It was the small entrepreneur who really suffered,” Jernigan said.

Bright side for REITs

As a result of overbuilding, Jernigan sees a promising opportunity for the REITs ahead.

“I will tell you there is a silver lining in it for the REITs because it is going to create some big buying opportunity for them and us as well,” Jernigan said. “We’ll roll right out of a development cycle into an acquisition cycle. There is going to be an enormous amount of new Class A property out there that is underperforming.”

Surgical development

As for Jernigan Capital’s future, Jernigan said the development cycle is still only about halfway done nationwide, and in some markets it is just getting started.

 “There are plenty of markets around the country and even more submarkets within additional markets that are ripe for development,” Jernigan said.

Jernigan said his company is using data to monitor supply and guiding its developers to target markets that are still viable for new facilities. For example, Jernigan said it is likely done sponsoring new projects in Charlotte and recently dissuaded a developer from a project in Denver.

“We have to be more surgical going forward,” Jernigan said.

Jernigan Capital generated a net income of $5 million during the third quarter, and $11.5 million year-to-date.

Since launching in 2015, the company has committed investments of more than $126 million for the construction of 16 new self-storage facilities—14 are participation loans in which Jernigan Capital receives 49 percent of positive cash flows. The company has also loaned a combined $14.9 million to five operating facilities.

Alexander Harris