As labor costs, interest rates and construction expenses keep climbing, Extra Space Storage Inc. CEO Joe Margolis said he sees a slowing down of new self-storage development, with some projects even being canceled amid that environment.

In an Aug. 1 earnings call with Wall Street analysts, Margolis credited that moderation to the discipline of some developers and lenders. But, he added, “I’m not going to say that there’s discipline all the way across the board.”

Moderation is especially prevalent in saturated markets like Dallas-Fort Worth, TX, according to Margolis.

However, just as some developers and lenders are shying away from markets like Dallas-Fort Worth, more of them are eyeing secondary markets, “which haven’t yet been impacted as much by new supply,” Margolis said.

Effect on third-party management?

Margolis said the current moderation in development activity could cause a slowdown in signups for the self-storage REIT’s third-party management platform in 2019, since two-thirds of additions to the program are new construction.

Between it third-party and joint venture programs, the Salt Lake City, UT-based REIT managed 700 facilities as of June 30. During the first half of 2018, Extra Space brought 83 facilities into its third-party management program.

Revenue and ROI on the rise

Regardless of moderation in development activity, Margolis said self-storage remains a solid asset class, given its high occupancy rates, healthy revenue growth and downturn-resilient nature.

Extra Space’s second-quarter numbers reflect that stability:

  • Same-store revenue grew by 4.1 percent compared with the same period last year.
  • Same-store NOI rose 3.8 percent compared with the same period in 2017.
  • Same-store occupancy remained steady at 94.2 percent at the end of the second quarter, compared with 94.3 percent at the same time last year.
  • The REIT bought three facilities and purchased its joint venture partner’s interest in 14 facilities for a total investment of $238.6 million.
  • In conjunction with joint venture partners, Extra Space bought five existing facilities and seven certificate-of-occupancy facilities, and completed one development. The REIT pegs its total investment in those deals at $35.3 million.

Operating expenses go up

Putting a small dent in the second-quarter results was an increase in same-store operating expenses. Those expenses went up 4.9 percent during the second quarter and 5.9 percent during the first half of the year.

Extra Space attributed the second-quarter hike in expenses mostly to more money being spent on property taxes, payroll and benefits, and marketing. For the first half of 2018, the REIT pinned much of the blame for cost increases on property taxes, payroll and benefits, snow removal and utilities.

Scott Stubbs, the REIT’s chief financial officer, said property taxes are expected to further squeeze Extra Space’s finances as property values continue to go up. “Property taxes are always a risk,” he said.

John Egan