Dean Jernigan, former CEO of self-storage REIT CubeSmart, says the recent uptick in spending on self-storage projects is just the start of a construction cycle that he predicts will stretch over the next four to five years. He expects the cycle to peak in 2016.
“We are essentially three-quarters through the year and yet very little has gotten started,” Jernigan told The SpareFoot Storage Beat. “I think [the development cycle] is going to be longer and more drawn-out because it is still difficult for people to access the debt market.”
Despite a tight market for money, developers did pick up the pace of self-storage construction in July. They spent 84 percent more on construction than they did in July 2013, according to new figures from the U.S. Census Bureau.
Self-storage construction spending totaled $68 million this July, the Census Bureau says. In July 2013, just $37 million was spent on self-storage construction, expansion and renovation projects.
The latest figures put this year’s self-storage construction spending ahead of last year’s, at least so far. From January to July 2014, companies spent $317 million on self-storage construction, up from $294 million during the same period in 2013.
Beginning of the cycle
Jernigan expects lending to slowly loosen up, leading to a quickening of the pace in self-storage development. He estimates that as many as 500 facilities could be built in the top 50 U.S. metro areas during the peak year of the cycle.
“That’s 10 per market, which doesn’t sound like a whole lot, but these things are so difficult to get entitled, I think that’s a fair number,” Jernigan said. “It will probably be 2016 before we get to a run rate of something like that.”
More than 50,000 self-storage facilities operate across the U.S.
Jernigan said his favorite markets for development are New York City; Dallas; Washington, DC; Atlanta; Austin, TX; San Antonio; Denver; Houston; and Boston.
High barriers to entry presented by land costs and zoning regulations are likely to keep those markets from being overbuilt, and will weed out the “casual players” in favor of the “professionals,” he said.
Last January, Jernigan launched his own self-storage lending bank, Jernigan Capital. He said he expects to start making his first loans at the start of 2015, with a focus on development loans in the top 25 metro areas and refinancing loans in the top 50 metro areas.