Slowing Storage Supply & Generational Opportunities

I had a conversation with the nation’s largest storage developer this week. This developer has consistently built $250-$400mm of storage annually for the last eight years.

This year, he expects to build $50mm.

This dynamic is playing out across our industry. It’s nuanced and we’ve covered how the largest REITs have changed their pricing strategy dramatically over the last 18 months.

To quickly review, instead of waiting nine months to raise the rent 8-12%, REITs are now raising the rents 30-80% after three months (based on DXD’s data of renting units across the country).

Most developers don’t understand this, and are abandoning or selling new projects which we will enjoy as long as it lasts.

As a result, new supply will be dramatically lower in the next 3-4 years.

Unsurprisingly, this developer is as bullish as he’s been over the last ten years about developing self storage. In fact, if it were solely up to him, his pipeline would be the largest it has ever been (next week’s note will dive into why his and most developers' pipelines are shrinking when they should be growing), but for now, let's focus on why he’s so bullish.

The last time we saw development slow down to these levels was after the recession in 2009. When supply shrinks, occupancy and rental rates grow.

Nantucket, MA

The situation we saw after 2009 is the same as the present day: The rate of new supply growth is about to slow dramatically, which is an enormous tailwind for storage fundamentals.

With developers putting fewer projects into their pipelines, we’ve encountered some generational opportunities.

If you asked me to list the top three locations where I would like to own a self storage facility, Nantucket would be one of them.

This trade area has achieved rates north of $400 for 10x10 units–that’s THREE TIMES the national average.

Rates are elevated because the barriers to entry are enormous.

It is likely that this will be the last self storage facility built on the island for the next 30 years.

These are the opportunities we are after and part of why we are so bullish on storage development.

If you want to learn more about how to invest with DXD, schedule a meeting HERE or email me at cory@dxd.capital.