Self-Storage Resists Recession Yet Again – REBusinessOnline



Merriman Anderson recently designed this 1,117-unit self-storage facility for Utah-based REIT Extra Space Storage. New deliveries in major markets have been minimal in 2020, but sources say that is more attributable to overbuilding than COVID-19.

By Taylor Williams

As commercial property types go, self-storage is considered one of the toughest to sink in times of economic hardship. As Texas and the United States enter the eighth full month of the COVID-19 pandemic, this quality is beginning to show through.

Natural disasters like floods and hurricanes tend to be windfalls for the asset class, as displacement from homes and damage to commercial properties raise short-term demand for self-storage. A pandemic does not have quite the same effect on the property type, especially when residential landlords in the United States are legally barred from evicting tenants.

But for the major self-storage markets of Texas, COVID-19 has generated some positive results. COVID’s impact on self-storage is somewhat similar to Hurricane Harvey’s impact on  the Houston multifamily market in 2017, which was also overbuilt and saw an overnight boost in occupancy as a result of the storm cutting into supply.

In essence, COVID-19 has served as a mechanism to bring supply-demand balances closer to equilibrium. Because prior to the pandemic, the development pipelines in the major cities of Texas were peaking, creating oversupplied markets that were defined by sluggish rent growth, concessions and high
levels of competitions for new entrants.

Supply-Demand Implications

COVID-19 has served to lessen some of the oversupply concerns in major markets by causing some new construction projects to be put on hold or scrapped entirely.

Bill Brownfield, Argus Self-Storage Advisors

Bill Brownfield, Argus Self-Storage Advisors

Bill Brownfield of Brownfield & Associates, the Houston-based affiliate of Argus Self-Storage Advisors, says the perennial demand generators of job growth and in-migration are also helping to ease supply concerns.

“Supply-demand balances in Houston and other major Texas markets are headed toward stabilization,” he says. “It’s just a question of how long it will take to get there, and our best estimate is 18 to 24 months.”

Brownfield notes that self-storage developers and operators in Texas have long been aware of supply glut, and that before the pandemic, lenders had begun to pull back on financing for new construction. That trend should continue through 2021.

“As long as REITs continue to hold off on new development, which should occur for the foreseeable future, and banks are prudent about lending, then the biggest risk for self-storage for the next couple years is moving behind us,” he says. “Now it’s just a matter of absorbing the overbuilt space.”

Dave Knobler, Marcus & Millichap

Sources agree that in general, oversupply is a greater threat to the health of the self-storage industry than

“The only thing that gets in the way of storage is storage itself,” says Dave Knobler, first vice president investments in Marcus & Millichap’s Houston office and the director of the firm’s National Self-Storage Group.

“You could have a flood, a hurricane, a pandemic — self-storage always has a way of wiggling out of trouble and even thriving in those situations,” he says. “But it can’t combat oversupply, and the Texas markets are littered with groups that developed facilities with certain rent expectations and are only hitting two-thirds of those projections.”


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