Analysis of Second Quarter 2019 REIS Findings in the Self Storage Sector
The Dog Days of Storage
Construction of new self storage facilities slowed in the second quarter of 2019; approximately 75,000 units came online in the quarter, rounding out the year-to-date completion total to 135,000 units. That represents a 33% decrease in new supply from last year when approximately 200,000 units had come online by the second quarter. Over a third of the newly completed units were in the South Atlantic region, followed by the West and Northeast regions with 20,000 and 12,000 units, respectively.
In keeping with the sector’s cyclical nature, the second quarter saw a healthy boost in occupancy with approximately 160,000 units absorbed. The national vacancy rate for the self storage sector, which includes both climate and non-climate controlled units, fell by 100 basis points to 12.6%. That represents a 130 basis point increase year-over-year and is a far cry from the sector’s most recent low of 9.2%. We expect the vacancy rate to continue to rise through 2019 before flattening out in 2020.
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Weakness was evident in rent growth, with rents for 10x10 units all consistently exhibiting negative rent growth across all regions, but particularly in the Southwest. Year-over-year, national rents fell by 1% and 2.3% across 10x10 non-climate controlled (NCC) and climate controlled (CC) units, respectively. National rents rose by 0.6% and 0.8% across both unit types over the quarter.
This is the supply-driven slump we’ve been forecasting over the past couple of years, and it will likely remain in effect at least through the end of 2019. While completions have slowed in comparison to 2018, we still expect roughly 240,000 new units to open their doors by the end of the year. Things will begin to taper off in 2020, though it will be a few years for the sector to settle back into its “natural” vacancy rate. Rent growth will likely be negative over the year and recover in 2020 and beyond.
Statistics by Metro
Sixty-nine of the 125 metros that Reis is tracking saw no completions in the second quarter. Phoenix, Atlanta, Miami, and Long Island saw the largest number of completions in the quarter, all of which saw more than 3,000 units come online. Des Moines, Worcester, and Albany saw the greatest number of completions as a percentage of total inventory. Each of these metros posted completions in excess of 6% of inventory.
Speaking of high completion rates, Des Moines and Worcester registered the top two highest quarterly increases in vacancy across all 125 metros. These two metros saw vacancies climb by 410 and 370 basis points, respectively. The third highest quarterly increase — a tie between Springfield, MO, and Boise — was over 200 basis points lower than the increase in Des Moines and Worcester.
Despite these outliers, the second quarter is usually the strongest for occupancy growth. Ninety-seven of 125 metros saw an increase in occupancy over the quarter; metros with the largest increase in occupancy include Syracuse, Suburban Virginia, Boulder, Las Vegas, and Suburban Maryland. Increases ranged from 310 basis points in Maryland to 420 basis points in Syracuse.
Seventy-eight metros saw positive quarterly rent growth for NCC 10x10 units with Asheville, Charlotte, Providence, Melbourne, and Omaha leading the pack. Twenty metros saw rents fall in the quarter — Louisville, Raleigh-Durham, Birmingham, Savannah, and Worcester all registered drops of 2% or more.
Rent growth across climate controlled units was less evenly distributed. Twenty-five metros posted an overall decrease in rents while 92 metros saw an increase. Nineteen of those metros saw rents rise by 3% or more. Metros with the largest increase in rents include Providence, Boulder, Rochester, Chattanooga, and Montgomery.
Outlook
Reis expects supply conditions to ease towards the end of the year and into 2020. In the meantime, we are projecting rents for both climate controlled and non-climate controlled units to trend negative in 2019 and recover in 2020 and beyond.
Likewise, we are projecting occupancy to fall in the wake of the sector’s supply glut in 2019. Conditions should begin to ease over the next two years, though it will likely be some time before the sector sees growth akin to the early and mid-2010s.
With that in mind, some forecasters are calling for a recession to occur in 2020. One of the most attractive features of self storage is its resilience towards recessions, especially in comparison to other sectors. We do not expect any cataclysmic changes to our projections in the case of a recession, though they may have to be tempered.