Supply Pressure Continues
Due to the ongoing supply gut in the self storage sector, the national vacancy rate (which includes both climate and non-climate controlled units) rose 20 basis points to 13.6% in the first quarter. That represents a 160 basis point increase over the first quarter of 2018 and the third consecutive quarter in which completions outpaced net absorption. While part of this rise can be attributed to seasonality, the long-term trend points to weakness due to oversupply.
Approximately 52,000 new units came online in the quarter, falling short of both the 2018 average of 93,000 units per quarter and the 98,000 units recorded in the first quarter of 2018. An-other 27,000 units were absorbed in the quarter, also falling short of the 2018 average of 43,000 units per quarter. Would-be renters cannot fill new units as quickly as developers can build them, placing continued upward pressure on the vacancy rate.
The distribution of new construction was not entirely balanced; of the 125 metros that Reis tracks, 80 of them saw no completions in the quarter. New York, Phoenix, and Northern New Jersey saw the largest number of completions in the quarter, all of which saw greater than 3,000 new units come online. Charleston, New Orleans, Albuquerque, and Naples saw the largest gains in new completions as a percentage of total inventory, each of which saw new completions in excess of 3% of inventory.
Rent Growth Remains Strong
Despite these concerns, rents grew at comparable rates to those observed in the first quarter of 2018. Rents rose by 1.6% and 0.9% for 10x10 non-climate-controlled and climate-controlled units, respectively. Units in the 5x10 range saw rents rise by 1.9% and 1.1% across the same sub-sectors. Climate-controlled 10x15 units saw the smallest growth at 0.1%, while non-climate-controlled 10x20 units saw the largest at 2.2%. Again, some of this growth can be attributed to seasonal effects. The annual trend for 2019 will be indicative of whether or not the sector has turned the corner and begun absorbing excess supply.
Statistics by Metro
Westchester, Minneapolis, and Wilmington saw the largest decreases in vacancy with drops of 220 basis points or more. Seventy-four of 125 metros saw an in-crease in vacancy with Provo-Orem, Memphis, and Albany leading the way. In many ways, Provo-Orem represents a “perfect storm” in terms of the ongoing supply glut. Despite nine consecutive quarters of negative net absorption, the area saw a 3% increase in inventory in the quarter. This has reinforced an already long-standing trend of vacancy increases for the area: vacancies have risen 1,290 basis points since the second quarter of 2017.
Asheville, Omaha, and Miami saw rents for 10x10 non-climate-controlled rents rise in excess of 6.6% in the quarter while Vallejo-Fairfield, Denver, and Suburban Maryland saw rent fall by 1.8% or more. New York – which commands the highest rents nation-wide – rose 3.6% over the quarter while rents in San Francisco rose by 0.7%.
Similar to the new construction rankings, Phoenix, New York, and Minneapolis posted the highest net absorption figures in the quarter. Oakland-East Bay, Los Angeles, and Memphis rounded out the bottom three rankings. Overall, 69 of the 125 metros saw positive absorption over the quarter.
Outlook
Our outlook for the sector remains largely the same as last quarter. We expect supply pressure to continue through the second quarter before tapering down in 2020. Reis is projecting approximately 220,000 new units to come online in 2019, pushing the vacancy rate over 14%. As few as 66,000 new units are projected to come online in 2020. Given the slowdown in construction, as well as relatively solid absorption moving forward, the vacancy rate is projected to flatten out and then fall back towards 12%.
Why Does REIS Track ‘Units’?
As we track occupancies, our primary means of doing so is via the population of rentable units - as opposed to the Facility level. A large facility with a high number of vacant units at 20% occupancy will contribute more to bringing down the submarket or metro occupancy rate than a smaller facility with the same level at 20%. One other way of size-weighting an aggregate measure would be to use the exact amount of leasable area (in SF) in any facility that is vacant, but that would mean knowing precisely which units (and its SF) are vacant at any given moment – something we do not track in real-time.