New self-storage development has slowed in some key markets across the country after years of rapid expansion. Spurred by high demand and an influx of institutional investment dollars, record levels of construction have led to a surge of new storage space across the country over the last five years.
But most experts are not quite ready to declare a full-fledged national slowdown in the development of new self-storage facilities, saying some areas of the country, such as the Pacific northwest, are still growing like gangbusters while other regions, such as the Northeast, are seeing a steady expansion of new facilities.
Dip in spending
Data from the U.S. Census Bureau seems to suggest that a slowdown of some sort may be under way. Construction investments dipped in the months of April, March and February, compared to the same months in 2018.
|Date||Mini-storage construction spending in millions of dollars|
The declines weren’t huge– April’s construction spending was $426 million, down from $480 million nationwide the year before – but it was the first three-straight-months dip in investments in years and anecdotal evidence suggests it may be tied to a significant drop off in new construction in places such as Texas and Colorado.
“The slowdown has been very pronounced here,” said Bill Bellomy of Bellomy & Co., an Austin, Texas-based self-storage brokerage firm.
Bellomy estimated that the number of new-construction deals being proposed in Texas is down by 40 to 50 percent, thanks largely to past overbuilding in key state submarkets that have slowed the lease-up rates for new facilities.
“Deals just don’t pencil out like they used to a few years ago,” Bellomy said of the current rate of returns in Texas.
Ginny Sutton, executive director of the Texas Self-Storage Association, said the major metro markets in the Lone Star State – Austin, Dallas-Fort Worth, Houston and San Antonio – have all seen a pull-back in new construction.
“It’s slowed for sure in the major markets,” she said, blaming the “flurry and onslaught” of past new developments that have flooded parts of the state and driven down lease prices.
Pulling back the reigns
In Colorado, Jackson White, manager of Sussex Investments LLC and president of the Colorado Self-Storage Association, stressed he couldn’t speak on behalf of his trade association. But he said he’s personally observed a major pull back in new developments in some areas of Colorado, such as in downtown Denver.
Again, the problem: Recent overbuilding. White said Colorado’s legalization of marijuana in 2015 led to a flood of people moving into the state, increasing the demand for self-storage and encouraging new developments.
“It attracted way more investors and developers than we’ve ever had,” he said. But the population growth – and thus the demand for self-storage – has softened lately in Colorado, leading to a “general slowdown,” said White.
Pockets of activity
In a new report, Yardi Matrix, a commercial real estate data and research firm, says Charleston, South Carolina has also seen its once red-hot self-storage market cool in recent months.
But Yardi Matrix, in its June industry report, also notes that new developments, either under construction or in the planning stages, are still on track to add about 9.5 percent to the overall supply of self-storage in the nation.
Indeed, data suggests that metro areas such as Portland, OR, and Seattle and Nashville, TN are picking up the slack from other markets.
Portland’s properties under construction or in the planning stages were up 27.7 percent on a month-over-month basis, Yardi reports, while Nashville was up 22.7 percent and Seattle was up by 21 percent. In all, about one-quarter of the major markets tracked by Yardi saw an increase in new developments during the spring months.
John Bull, owner of John Bull Builders LLC in Portland, said he sees no slippage in his region. “There’s a lot of people out there with money,” he said. “The demand is still there for more.”
Caesar Wright, head of Mako Steel, a California provider and installer of steel frames for self-storage facilities, says he’s also seen no construction let up in the Golden State. “My work has been steady and the pipeline looks good through 2020,” he said.
R.K. Kliebenstein, vice president of acquisitions at Metro Storage, said his national firm is doing quite well across the board, though he noted some markets are stronger than others.
Marc Boorstein, a partner at ML Partners at Chicago, said total construction in the U.S. may well be up in 2019, pointing to a recent KeyBanc Capital Markets report that says new facility openings could hit an estimated 630 this year, up from 573 facility deliveries in 2018.
Still, Boorstein said he’s convinced something is stirring out there – and it all points to a possible national slowdown. He said he recently surveyed 25 of his firm’s self-storage clients and “all of them” reported a new-development slowdown, citing increased competition, rising construction costs and a tightening lending market.
“This is the first time I’ve seen this in years,” he said. “Maybe this indicates we’ve reached a peak. I don’t know. We’ll have to see. There’s still building going on out there, but it appears to be slowing.”