HOUSTON – (By Kyle Hagerty for Realty News Report) – Capital flocking to self-storage REITs may have weakened the sector’s strong fundamentals, but stable metrics in the latest report from Newmark Knight Frank show the industry’s supply concerns may be over blown.
In the first quarter of 2019, wholly owned acquisition activity totaled 61 properties across five of the six publicly traded self-storage REITs for an aggregate volume of just over $586 million, according to Newmark Knight Frank’s Q1 2019 Self Storage REIT Report. Compared to the $1.3 billion of acquisition volume for all of 2018, the volume in just the first-quarter of 2019 suggests activity will be robust through the remainder of year, according to NKF.
The sector’s biggest issue remains the flood of new supply. The relative simplicity and efficiency of the business has developers and new capital adding supply in nearly every market. With only six players, the fragmented nature of information reporting and sourcing makes development numbers, like most metrics in the sector, hard to quantify. The fragmented nature of new construction has also clouded its impact.
However, the general sentiment towards 2019 calendar-year NOI growth projections has improved, according to NKF’s report, which combines information from five of the six publicly traded self-storage REITs; Public Storage (NYSE: PSA), Extra Space (NYSE: EXR), CubeSmart (NYSE: CUBE), National Storage Affiliates (NYSE: NSA) and Life Storage Inc. (NYSE: LSI).
It’s widely considered that new supply will not have a major macro impact on industry trends, but some submarkets may experience outsized negative impacts, felt most by properties in lease-up. Deliveries likely peaked in 2018, somewhere between 500 and 650 properties, with the impact being felt mostly in the second half of 2018, according to NKF’s estimates.
While deliveries may be slowing, acquisitions are picking up.
In 2019, cap rates for stable properties have compressed as more diverse capital is deployed in the self-storage sector looking for better returns. Self-storage returns compare favorably to other property types, appealing to more traditional investors, leading to the compression of return expectations, according to NFK. Stabilized return on cost, a more significant metric than cap rates, according to NFK, is 15 to 35 basis points lower coming out of the first half of 2019 than it was at the end of 2018.
The sector is positioned to maintain the strong operating metrics that have been attracting investors. National interest rates and economic growth will help to dampen the industry’s supply issues.