CALABASAS, CA—Set against the backdrop of a still-robust economy, the self-storage sector remains strong. But, as Marcus & Millichap reveals in its 2018 Self-Storage Investment Forecast, there are trends that bear watching. Prime among these is the dynamic between development and absorption.

“It's important to note the underlying economic momentum supporting self-storage demand,” says John Chang, national director of Research Services. “Steady job creation and elevated confidence levels are both key factors sustaining space demand.”

The tight labor market could be a double-edged sword, he notes, and the new tax law could increase pressure on the market as it spurs hiring, business investment and GDP growth. If there are any potential clouds on the horizon, “If there are any potential clouds on the horizon, “businesses are facing a labor shortage that could weigh on overall business expansion,” he says. “These tight labor conditions could place upward pressure on wages, potentially boosting inflation.”

That said, the self-storage market reflects the current strong state of the economy, reports Joel Deis, VP and national director of the National Self-Storage Group: “The retirement and downsizing of baby boomers coupled with the continued emergence of millennials will support the need for self-storage space in the coming years. This demand will only strengthen as these generational forces unfold, providing a positive long-term tailwind for the market.”

The active multifamily market further buoys the self-storage industry, Deis notes, since “apartments often do not offer enough space to house all of a resident's belongings. Additionally, renters move more frequently, and temporary storage during a move remains a primary reason for renting storage space.”

However, while demand is strong, “aggressive development activity over the past two years is starting to overtake absorption in several markets,” he continues. “Moving forward, the average vacancy and rent growth may soften amid greater competition, particularly in construction-heavy metros.”

On the investment side, a conservative approach is becoming evident, he notes, at least on the part of buyers. “The market is entering a period of transition as rising interest rates, elevated development and more historically normal property performance have tempered buyer assertiveness,” says Deis. “Sellers, on the other hand, continue to expect peak pricing and are baking strong revenue growth forecasts into current values. As a result, a gap between buyer and seller pricing expectations remains open, weighing on transaction volume and elongating closing times.”

REITs as well are responding to what Deis calls “growing industry headwinds,” and they're growing conservative in acquisitions. “While high-end properties in quality locations will still be actively pursued,” he notes, “REITs may shift their focus to expanding their third-party management business.” He explains that this strategy has proven an effective one, allowing REITs to “control more assets while avoiding direct upfront purchases.”

(For the full report, please click here.)