Original story on CPExecutive.com
Once described as the ugly duckling of commercial real estate, self storage is now one of the most popular alternative asset classes. In the past year, the high level of development activity has led to less pressure on rental rates. Still, healthy levels of demand maintained a competitive market, transforming the dynamics of the industry.
City Line Capital President & CEO Rick Schontz, Senior Associate Anna Dwyer and Vice President Matt Morlino commented on the most impactful trends and challenges that occurred in 2019 and shared their predictions for the 12 months ahead. City Line’s portfolio, built over the last three years, includes properties in 18 states. The company plans to expand in new and existing markets.
What were the main challenges in the self storage sector in 2019?
Schontz: Pricing expectations remained high through 2019 even with the onset of new supply entering various primary and secondary markets. The delivery of new supply has resulted in rental rate compression along with significant increases in marketing spend to remain competitive.
What trends impacted the industry most last year?
Dwyer: As the self storage industry has grown in popularity, the overall industry has become more sophisticated in both investment and operation. Both institutional and private equity are seeking out self storage as an alternative asset for yield and are doing so by either acquiring existing, cash-flowing facilities with management upside or developing the assets themselves.
Secondary market facilities have become increasingly more popular over the last 12 months. How did this change the dynamics of the self storage industry?
Schontz: The pricing of properties in secondary markets has increased with the influx of capital trying to find a home and unable to compete with institutional equity in major markets. Subsequently, more professional third-party management companies have entered secondary markets, thus increasing the level of competition.
What are the main characteristics a self storage facility shouldn’t lack in 2020?
Morlino: Tenants expect a well-maintained, secure property with modern amenities such as online rental/payments and on-site automation.
What are your predictions for the self storage industry in 2020?
Morlino: Although planned developments have slowed down in certain major markets, we will continue to see new products hit the market and will have to adjust revenue and marketing strategies accordingly. With all the new supply out there, we are seeing tempered pricing expectations as some of these new developments are falling short of their rental rate projections. We remain bullish in the asset class as a strong national housing market and multifamily market along with population growth will continue to drive new rentals.
Capital markets will also play a major role, from an investment standpoint, over the next year as historically low-interest rates have driven pricing on potential acquisitions.
What markets are you targeting in 2020?
Dwyer: City Line Capital is looking to expand its footprint in existing markets, as well as plant seeds in new markets that we think we can scale in the future using a third-party management platform. We are continually seeking new investment opportunities in markets with strong population density and growth, along with limited new supply in the submarket.
How is City Line Capital preparing for a potential downturn? What is your strategy?
Schontz: Our investment strategy has been to acquire cash-flowing facilities while looking conservatively at long-term rental rate projections.