Self-Storage Market Conditions • Section 11 T


he industry operated at historically high occupancies throughout 2017, and revenue growth was broadly reported, although the rate of growth continued the


moderation that was observed in the second half of 2016. While revenue growth remained positive for the industry, there was more rental rate discounting reported in the first half of 2017. However, the market also reported wide-ranging rental rate stabilization in the second half of 2017, and con- cessions remained confined to new construction properties still in their initial lease-up cycles.


As was the case in 2016, we continued to see a healthy


debt market for self-storage with lenders increasingly com- fortable with, and understanding of, the product type. This has led to a deep pool of debt capital deploying into the space. The lenders’ lead of increasing comfort with the product type has welcomed a considerable amount of joint venture equity into the industry, into both existing proper- ties and portfolios as well as into development programs. Unlike in previous years with the newer joint venture equity capital active but not necessarily abundant, 2017 was the first year where this “new” capital was a considerable percentage of the transaction volume. Construction financing remains the most challenging, with substantial capital required to fund a project along with regulatory restrictions limiting traditional banks.


It will always be the case that the local sub-market around


any given site will provide most of the relevant data points. However, the context provided by comparing a given site or a given market to the industry overall can reveal underlying strengths and weaknesses that otherwise could be ignored. Especially relevant are the overall trends within datasets as well as comparative sets like smaller markets vs. major mar- kets or population centers vs. more rural markets. While rental rates or supply per capita in one market might mean very little to a specific site in another market, the trends and characteristics of the comparisons are extremely relevant.


With development especially, but with acquisitions as


well, it is critical to understand as much as possible about the supply/demand economics. The strength in self-storage op- erations throughout 2016 has been due in large part to the absorbable level of new supply that has entered the market over the last five years. Maintaining this equilibrium is the key to long-term prosperity for the industry.


State Supply Levels While the performance of an individual self-storage facility is more dependent on local market conditions, national, state, or regional trends can be useful for benchmarks and com- parisons to local trade areas.


The State Saturation Levels Table 11.1 summarizes the rentable square footage per person for each state as well as


the national average. The national average of 7.06 square feet per person is a weighted average (total square feet divided by total population) rather than a straight-line av- erage (the straight-line average of the U.S. market is 8.04 square feet per person). The weighted average essentially spreads the excess supply (from some markets) across the country so that it is artificially absorbed by excess demand (from other markets). Therefore, its relevance is strongest when defining the size of the overall self-storage universe as it pertains to the country overall. In other words, just by virtue of having 7.06 square feet per person across the U.S., it does not mean that that is equilibrium for the industry on a nationwide, statewide, or market-wide basis. It is merely a statement that the size of the supply side of the U.S. market is 7.06 square feet per person.


MSA Supply Levels Tables 11.2a and 11.2b benchmark the national rentable square feet per person against the supply within the MSA. Again, it is not an indication of whether a market is oversup- plied or undersupplied, nor is it a measure of equilibrium. It is simply a comparative supply table by core based statistical area (CBSA).


The CBSA table can be used for comparisons and bench-


marking; however, it does not address local self-storage market conditions. Studies and research have shown that demand for a typical self-storage facility is local. On aver- age, most facilities draw at least 75 percent of its tenant base from within a three-mile radius. Moreover, as the industry continues its mainstream maturation, and product aware- ness on its own grows the demand side of the economics, a greater percentage of the tenant base at a given facility will source from within a much tighter radius than three miles. This is especially true in urban markets and in high- density suburban markets where tenants rarely come from outside a one-and-a-half-mile radius. Add to that the real- ity that demand for self-storage is difficult to induce from outside the local sub-market trade area, finite due dili- gence on a specific trade area is paramount to success. It is important to understand the general market character- istics within the CBSA and then reduce down the apparent demand-behavior within the micro local trade area specific to the subject property.


Location The first step in understanding a local market is to survey all local competition within the trade area for rental rates, discounts and concessions, apparent occupancy, competi- tive amenities, location attributes, ease of ingress/egress, and gross supply. From this data, the rentable self-storage square feet per person for the trade area can be determined and compared to national, state, and CBSA benchmarks. The analytical conclusion will reveal the approximate sup- ply/demand imbalance characteristics for that sub-market


2018 Self-Storage Almanac 135


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