Another big year lies ahead for the self storage industry as gains in market fundamentals and net income continue to draft behind a rebounding economy, improving operations and activeinterest. The four largest publicly held storage REITs performed exceptionally well last year, backed by improvement in most all major metro markets across the US. 2013 promises to continue that trend, especially in the West.
Occupancy rates in the Pacific States jumped by 460 basis points to 84.9% according to a fourth quarter 2012 report by Marcus & Millichap. Job growth in the Silicon Valley, San Francisco and Seattle metro areas led the way, increasing consumer confidence and thus driving new demand for storage.
Occupancies will continue their rise in 2013, given the lack of new supply and a gradually improving economic recovery. Discounts and concessions are expected to decline as well amid growing demand. Market fundamentals continue to improve, and rent growth is outpacing occupancy growth.
Not surprisingly, the four big storage REITs each posted percentage increases in 2012 net income that outpaced revenue growth rates. Operating efficiencies have been realized by fewer concessions, regional aggregation and improved operations that better serve a rapidly growing online customer base.
Smart, tech savvy storage operators with a scalable technology platform catering to the digital consumer are capturing new demand, and doing it with greater efficiency than ever. Meanwhile, many smaller operators are challenged by a lack of man power, capital, or the systems to compete with the larger regional companies and REITs.
The storage market is undergoing dynamic change for owner investors of small portfolios and single store. For those operators unable to reinvest in new systems and technologies, consolidation is the answer, either through asset aggregation or hiring professional third party management.
Consolidation enables a standardized service offering, greater marketing resources, lower operating costs, higher profitability and ultimately higher values. Expect to see more independent owners take this path to remain competitive.
As a case in point, The William Warren Group took over the management of seven stabilized self storage assets in 2011 that were previously operated by a smaller regional management firm. A year later, following the implementation of new technology systems that included web, social media and revenue management strategies, top line revenue increased by 15%.
Improving market and asset-level fundamentals have attracted the attention of investors, and there is no shortage of low cost capital trying to enter the sector. Yield-seeking investors are finding more and more value add opportunities where properties with otherwise good real estate fundamentals couldn’t remain operationally competitive under their existing management structure.
At the same time, investor interest is high for institutional grade assets in major markets, evidenced by the stellar performance of the largest REITs and strong regional owner operators. Robust operating platforms afford larger players a significant market advantage.
Self storage is an asset class that has shown surprising resilience throughout the Great Recession. This should continue to be the case in 2013 with improving demand for storage, better operating efficiencies and sustained investor interest. The long term investment outlook for storage is promising.
Bill Hobin, is the president and CEO of The William Warren Group, owners and operators of StorQuest Self Storage.