Section 3 • Development Pipeline Many projects that were expected to be completed at the
end of the year were pushed into 2021. Contributing to slug- gish construction activity in many communities, COVID also shut down building permits because municipalities closed for business for extended periods.
Lease-Ups And Rentals Slowing Lease-up activity for newly opened facilities in 2020 was problematic across the country. The problem was twofold: Not only did many new facilities have to compete in over- supplied markets for new tenants, but the pandemic ground traffic to storage centers to a halt as local governments or- dered residents to shelter in place during the worst stretches of COVID.
Lease-up times are extending as we move through this
current cycle. Looking at new stores in the Extra Space port- folio, for example, facilities tended to stabilize to 80 percent occupancy within two years after opening in 2016 and 2017. But in 2018, new Extra Space stores open for two years ex- perienced an average of 10 percent to 15 percent lower occupancy. For stores opened in 2019, occupancy is growing even slower.
Rental rates took a temporary dive early in the year when
customers sheltered in place. The real estate investment trusts (REITs), which largely drive the self-storage market, employed a strategy of slashing rates dramatically just to win the few customers who needed storage. Once the lockdowns lifted in June, July, and August, we saw rate recovery in a lot of those markets, and demand has since rebounded.
The combination of longer lease-ups along with declin-
ing rates can spell calamity for newer facilities living on the edge. Stronger, stabilized stores can withstand economic
1 2 3 4 5 6 7
10
Cape Coral-Ft. Myers, Fla. Des Moines, Iowa Greenville, S.C. Orlando, Fla.
Nashville, Tenn.
Minneapolis-St. Paul, Minn. Myrtle Beach S.C.
8 Charleston, S.C. 9
Source: U-Haul International 36 Self-Storage Almanac 2021
Colorado Springs, Colo. Portland-Vancouver, Ore.
12.9 10.4 9.7 9.5 9.4 9.2 9.1 8.8 8.6 7.6
downturns, as was illustrated during the Great Recession. However, newer stores in highly competitive markets may have difficulty staying afloat.
Facilities in lease-up don’t have the reliable revenue from
existing customers to the extent stabilized stores do, so rates falling 50 percent in some markets because of COVID took an incredible toll on the lease-up and revenue trajectories of newer stores. The COVID effect is more like the straw that broke the camel’s back, not the culprit of the crime.
Lending slowed not because
self-storage itself had issues; storage has gained considerable visibility in
the financial community because of the industry’s strong performance.
But the fate of these weaker stores lies ahead in 2021.
Once the country gets a better handle on the virus and business activity returns to more normal levels, rates and oc- cupancies should rise again and these facilities may be able to sufficiently recover.
Compounding the problem is that financing also has
been adversely affected by COVID, as many banks had to curtail—or even cease—operations for months on end. This can be problematic for facilities in the development pipeline as well as for some recently opened stores.
Lending slowed not because self-storage itself had issues;
storage has gained considerable visibility in the financial community because of the industry’s strong performance. The problem is that many lenders have exposure to hotels, multifamily, student, and senior housing assets that are in financial trouble. They must reserve capital against losses they expect to experience, which reduces their willingness to continue lending to their most risky category, which is con- struction, even if it is self-storage.
Rural Relocation One of the temporary effects of COVID-19 that may become permanent down the road is the apparent exodus of resi- dents from major urban centers to suburban and even rural locations. People living in close proximity in New York City, San Francisco, and other major metros with high real estate costs began relocating to areas of less density as the pan- demic struck.
A New York Times report found that 56,000 New York-
ers activated mail-forwarding requests to the United States Post Office in March, more than double the typical monthly average.
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