18 Oct 2019
This article originally appeared on REBUSINESS Online
Developers of self storage properties in major Texas cities are consciously putting the brakes on new construction as they wait for excess supply to be absorbed and for positive rent growth to return to the market.
The market has been moving in this direction for some time. While property owners have generally maintained occupancy rates that meet pro forma thresholds for profitability, rent growth has been and will likely remain stunted. Supply growth has led to competitors cannibalizing each other’s market shares.
In addition, ever-rising construction costs and a dwindling inventory of buildable sites are also governing the pace of new self storage development. While certain pockets of developable sites still exist here and there, lenders and equity providers have also taken note of the saturated landscape and are tightening their purse strings for self storage projects.
Data from self storage tracking platform Radius+ notes that the volume of new development in Dallas, as measured in net rentable square feet, is set to expand by 8.1 percent in 2019. Supply levels for 2019 in Houston and Austin are projected to increase by 4.3 percent and 12 percent, respectively.
Sam Smalling is a development associate at The Jenkins Organization, a Houston-based developer and manager that recently opened an 850-unit facility in downtown Houston and an 800-unit property in Austin. In his view, in the urban cores of Houston and Austin, it’s getting harder to find sites that haven’t been scouted by competitors and to find submarkets lacking a strong self storage presence.
The key factor among these inhibitors, Brownfield says, lies in the fact that the investment market encompasses stabilized properties, as well as facilities that are newly built and in lease-up mode.
Both Mellon and Johnson of Bellomy believe that in general, investors targeting self-storage deals in Texas are demonstrating a more sophisticated understanding of the space.
In many ways, the Texas self storage market has followed a common cyclical trajectory over the past five to 10 years. But developers, investors and brokers within the space all appear to be keenly aware that the cycle is on its last leg.
The million-dollar question centers on how long it will take for the market to absorb existing supply and be able to bear positive rent growth once again. The answer to this question will vary from submarket to submarket, but in the meantime, the focus in the Lone Star State is on maximizing income streams at existing facilities rather than expanding footprints.
