Storage Industry Outlook Bright Despite Increasing Supply Growth

SS revenue & NOI growth was strong across the board in the first quarter for the storage industry. That is according to RBC Capital Markets. “ The storage companies produced SS revenue growth of between 6.5% and 9.1% and SS NOI growth of between 9.9% and 12.9%. Strength was broad based with many major metros producing SS revenue growth over 5.0%,” the firm says in its latest report. “The SS NOI growth was a cycle high and likely the highest on record.” The firm points out that expense growth was low due to favorable utility costs and lower snow removal costs. But the firm says that the strong operating performance in the quarter continues the trend of well above average growth. Looking forward, RBC expects “outsized growth to continue as occupancy remains elevated which should lead to healthy pricing power.” And the outlook remains very good despite the increasing supply growth, the firm says. “After years of limited supply, the industry is now starting to experience an uptick in new supply with estimates ranging from 600 to 1000 facilities which is two to three times the average since the recovery, but only 1.0% – 1.5% growth. We believe the initial rounds of supply will be absorbed with no material impact due to pent-up demand.” The firm notes that recent developments have stabilized well ahead of the normal three year lease-up period. For example, it points to EXR’s pipeline of C of O deals, which they expect will lease-up in less than 1.5 years at the current pace. From a geographic perspective, Dallas and Houston were highlighted on a few calls as having above average supply growth, the firms says. “New York is also expected to experience meaningful supply growth, but the market has a highly favorable supply and demand backdrop with storage per capita well below the national average of 8.0.” But acquisitions are pricey, the firm says. “The general consensus was that deal flow had increased as lower cap rates have enticed sellers. Management teams estimated cap rates have fallen some 25 to 75 bps over the last year.” Despite the lower cap rates for acquisitions, the REITs were able to source deals in the quarter, the firm adds. “Moreover, the REITs have steadily turned to development and certificate of occupancy deals to supplement their external growth.” RBC Capital markets believes “the elevated acquisition activity over the past year will provide an incremental tailwind for the SS portfolio over the near-term as many of the properties will take over a year to fully integrate into the REIT operating platforms.”