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Few Headwinds in Sight to Impede Self Storage’s Upswing, Says Marcus & Millichap

CALABASAS, CALIF. — Combined with minimal construction, rising demand for self storage space from consumers is driving the sector’s decrease in vacancy and increase in rental rates in 2015, according to Marcus & Millichap’s semi-annual Self Storage Research report.

Construction has been anemic in the self storage sector, mostly due to the increasing land prices as a result of the competition for multifamily development sites. Additionally, the report cites that permitting and entitlements for self storage pose a challenge for developers because municipalities are seeking more potent sources for fees and tax revenue.

As of this writing, approximately 3 million square feet of self storage space is under construction, according to the report. A large chunk of that development is underway in Phoenix and New York City’s Brooklyn and Queens boroughs. Marcus & Millichap expects self storage development in 2015 to total 4.4 million square feet, a decline from the 5.2 million square feet delivered in 2014.

Real disposable income, a key metric for the report that takes inflation into account, increased 0.4 percent from January to February, according to the U.S. Bureau of Economic Analysis. Real disposable income has risen by 0.4 percent month-to-month going back to October 2014, except for December’s 0.3 percent showing. (Investopedia defines real disposable income as the amount of money that households have available for spending and saving after income taxes have been accounted for.)

The uptick in real disposable income translates to more spending on consumer goods suitable for stowing. The increase in spending and the sluggish construction cycle has led to the lowest vacancy rate for self storage in the past three years.

During 2014, nationwide vacancy fell 150 basis points to 12 percent. In the preceding 12 months, the vacancy rate dipped 140 basis points. Major markets in California have experienced a strong growth in occupancy during 2014, with vacancy dwindling 350 basis points in Sacramento, and vacancy declines exceeding 150 basis points in San Diego, the Inland Empire and Oakland. Atlanta also experienced a strong dip in vacancy, dropping 270 basis points.

Marcus & Millichaps expect vacancy to drop another 50 basis points in 2015 to settle at 11.5 percent nationwide.

Because of the dip in both vacancy and construction in the self storage sector, rents for both climate controlled and non-climate controlled units rose 3.8 percent in 2014. During 2013, rental rates rose 1.8 percent in climate controlled units and 1.7 percent in non-climate controlled units. For 2015, Marcus & Millichap expects the growth in rental rates to continue with an expected 4.2 percent increase for climate controlled units and a 3.8 percent increase for non-climate controlled units.

Due to self storage’s strong demand and rising rental rates, investors have jumped on board in droves. In 2014, transaction volume rose 20 percent from 2013 and dollar volume rose 40 percent. Marcus & Millichap expect sales to be even more robust in 2015, although the report didn’t specify its forecast for investment sale volume.

— Staff reports

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