Sometimes it doesn’t pay to follow the leader.
From the viewpoint of Public Storage CEO Joe Russell, bigger isn’t always better when it comes to the size of new facilities being run by rival self-storage operators.
During the self-storage REIT’s Feb. 27 earnings call, Russell said that among new facilities that came online in 2017 and 2018 — roughly $9 billion worth of properties measuring roughly 90 million square feet — many are bigger than have historically been built. Yet the overall super-sizing of new facilities might be problematic for some operators, according to Russell.
“You’ve got a number of owners out in some of these markets that frankly don’t have the tools or capabilities to operate them in a traditional way,” Russell told Wall Street analysts. “So I think there is an element of both disappointment and potentially and ultimately some level of distress that could come from that as they learn and see the challenges of running these larger properties.”
In many regards Glendale, CA-based Public Storage started the super-sized building trend, laying down larger facilities earlier on in the current building cycle, including a 270,000-square-foot facility in the Bronx.
Navigating the supply glut
Public Storage has led the way with its “supercenters”, the company hasn’t been immune from the adverse effects of new supply, at least in some of its major markets.
Those troublesome markets include Charlotte, NC; Chicago, IL; Dallas-Fort Worth, TX; and Denver, CO. Dallas-Fort Worth and Chicago were two of the REIT’s weakest revenue performers in 2018, posting year-over-year decreases of at least 2 percent.
“We still feel like we’re not out of a heavy-supply environment,” he said.
The company doesn’t expect that situation to change in the near term, Russell said. However, he added, many supply-hindered markets will see fewer deliveries in 2019.
In contrast to supply-crunched markets, Russell said the REIT’s most promising markets in 2019 include Atlanta, GA; Boston, MA; Los Angeles, CA; New York City, NY; Orlando, FL; and Philadelphia, PA. In 2018, Orlando, Los Angeles and Philadelphia were among the company’s strongest revenue performers, notching year-over-year gains of at least 3 percent.
Third-party management gains ground
As Public Storage awaits a shakeout of the supply glut, it continues to build its third-party management program, which launched in 2018. To date, the platform has signed up 50 facilities, Russell said.
“We’re very pleased with the traction that we’re seeing from our entrée into the [third-party management] business,” he said. “We’re seeing good receptivity to the components of our offering, which include, obviously, the brand itself, our operational capabilities, the ability to be part of our all of our initiatives tied to our marketing prowess.”
Additional highlights
- Public Storage is testing solar power at some of its facilities.
- The REIT purchased 25 facilities in 2018 for $181 million.
- After the fourth quarter ended Dec. 31, the company bought or put under contract 14 facilities for $102.4 million.
- Same-store revenue rose 1.5 percent from 2017 to 2018.
- Same-store NOI ticked up 0.9 percent from 2017 to 2018.
- Same-store operating expenses climbed 3.2 percent from 2017 to 2018.
