HOUSTON—Because of relaxed zoning, self-storage development is plentiful in major markets of Texas. And, investors recognized how well self storage did through the last downturn, resulting in numerous acquisitions by key players. On the heels of another storage acquisition for US Storage Centers, marking its 20th in Texas, Charles Byerly, president and CEO, discussed the future of self storage, investor returns and development in this exclusive.

GlobeSt.com: The self-storage industry continues to evolve. What can we look forward to in the next few years? 

Byerly: Over the past several years, we've continued to see a bifurcation take place in the industry very similar to the hotel industry the past couple of decades. Large operators that have a platform, the ability to track and understand data, and a strong management team, have continued to purchase more assets and take over operations for owners and investors who don't have the desire to build or invest in their own platforms. We believe this trend will continue, allowing the top operators like Westport Properties to own and operate a higher percentage of the total amount of stores nationwide.

GlobeSt.com: How have investor returns changed during the past few years and how do you think returns will change in the future? 

Byerly: We've seen investor awareness and interest in the self-storage sector increase significantly over the past 10 years or so. Investors recognized how well self storage did through the last downturn and understand that it should be added to the list of commercial real estate assets they should have exposure to. This has caused cap rates to compress considerably and will keep cap rates low, relative to the other commercial real estate types going forward. Spreads between self storage and multifamily are at the lowest level they have ever been and we would anticipate this spread remaining historically tight in the foreseeable future.

GlobeSt.com: How would you describe the state of development of self-storage facilities in Texas?  What is the ideal landscape for new development in this sector? 

Byerly: The self-storage industry has had an extended development cycle this time around, now running for seven-plus years. The development landscape for self storage is tougher today than ever with land prices and construction costs at all-time highs, coupled with rising floating rate debt and construction lenders being more selective with geography and returns. The icing on the cake is that we're seeing decelerating growth across the sector, putting added pressure on development proformas. Texas is a unique place in that zoning isn't as difficult as in other states, so development has been plentiful in some major markets of Texas. I would anticipate that some development will continue in Texas as some developers will still underwrite yesterday's rent growth and finance it with low or no leverage, allowing them to continue with projects. We would find it difficult for them to hit their proforma returns in this situation. The ideal landscape for storage development has passed us by in this cycle. Developers still looking for the ideal landscape will be hard pressed, but should anticipate cost-creep to continue as well as interest rate increases. Be sure to find a submarket with tempered new activity, strong rents and barriers to entry. Otherwise, those developers are setting themselves up for tougher projects.

GlobeSt.com: What else should our readers know about the Texas self-storage market? 

Byerly: We believe overall, the Texas self-storage market is a good long-term bet. Most major Texas MSAs continue to see net population growth and job growth, which help to drive good storage returns.  Investors should monitor supply growth in markets they are looking to acquire or develop. One new facility can collapse an otherwise stable submarket. Investors should be leery of Texas property taxes which have continued to be a challenge across the state and surprise many self-storage investors that are in acquisition mode. We continue to monitor property taxes, but it is hard to know when the components of property tax will change and in what jurisdiction. Texas also has higher than average insurance claims due to its weather and recent flood issues in Houston. Investors should be leery of these costs and flood zones as well as how the storage facility is built. Self-storage facilities built with dry rock or plywood partitions certainly fair worse than metal partitions in extreme weather and mold is a big issue complicating the acquisition and development analyses as well.