Self storage dichotomy

Investment sales of self storage facilities since August, 2007 have diminished appreciably from their robust activity of the prior four to five years, just like every other property sector in the market. The opulence of capital that helped fuel the investment sales activity had a market correction that hit hard and hit without much notice. The self storage industry as a whole had been enjoying unprecedented increase in supply and, for the most part demand as well these last several years. But supply of new product began influencing inventories and occupancy rates early last year, along with a noticeable glut of product in the Florida and Texas markets, where suddenly there were no hurricanes to stimulate demand. Indeed, the Self Storage Association indicates that the self storage industry literally doubled in size from one billion s/f of space in 1995 to two billion s/f in 2006. There are now 45,000 plus self storage facilities within the U.S. or the equivalent of 7.5 s/f of space for every person in this country! The good news, however, is that new construction starts have decreased dramatically these last 18 months and will probably continue at a much more normal pace of growth at 1-2% per year for the foreseeable future. That pace of growth will likely translate into higher occupancies, less discounting, and eventually to higher rental rates and increased revenues for existing operators. A traditional 50-60,000 net rentable s/f facility that used to take 18-30 months to lease-up and stabilize, is now taking 30-42 months to stabilize and making developer pro formas for new projects not feasible and newly-built projects have cash calls of their investors to continue to support the operating deficits until the project does stabilize. This economic climate may produce some investment opportunities for opportunistic buyers or hurt the self storage industry's reputation as having the lowest default rate in the CMBS market versus all other property sectors. The self storage REITs, like the other product sector REITs, have taken big hits in their stock pricing of late. However, now may be the bottom of the market given the fundamentals noted herein and a good time to move some of your money over to the self storage sector. Nicholas Malagisi is the national director of self storage for Sperry Van Ness Commercial Real Estate Advisors, Williamsville, N.Y.