Self Storage Beefs Up in Northeast

Nationwide, self storage units under construction or in the planning stages account for 9.3 percent of existing inventory, according to the latest Yardi Matrix report for the sector. Although development continued at an accelerated pace in the past year, supply in northeastern markets, such as Boston and New York, still lags demand. Numerous job relocations due to the trending flexible work culture and the presence of a large number of colleges and universities continue to drive the need for storage spaces in these historically under-supplied markets.

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Earlier this year, The Hampshire Cos. and Harrison Street have formed a joint venture to develop self storage facilities along Interstate 95, from Washington, D.C., to Boston, aiming to reduce the gap between supply and demand on the East Coast. Michael Legacki, senior acquisition manager at Hampshire, shared his views with CPE on the expanding self storage business and the difficulties that lie ahead.

What makes the Northeast an attractive market when it comes to investing in self storage?

Hampshire has been developing storage in the Northeast for over 20 years and Harrison Street recognizes the region as possessing some of the most desirable storage markets in the country. Furthermore, the Northeast is our backyard and it is nice to know the ins and outs of towns that we are investing so heavily in. Additionally, and probably most importantly, the Northeast provides an unparalleled density of population and high barriers to entry―the types of markets that we consider our sweet spot for successful self storage investment.

What is the number one demand driver on the East Coast?

Density of population.

What strategy do you use when choosing a storage location?

There are many factors that go into selecting a project to invest in, but most importantly, it is crucial to have a deep understanding of the competitive market, specifically, supply and demand. As this asset class has emerged in recent years, there have been many newcomers to the self storage sector, which has crowded the market. This made it even more important to analyze the supply and demand equation before investing in self storage and being cognizant of future developments which may impact a project’s long-term outlook.

How do opportunity zones fit into the firm’s expansion plans and strategies?

We try to find deals that are solid investments for our investors, lenders and for Hampshire as well, and projects that will provide a benefit to the community. If they happen to be located in an opportunity zone, it is just that much better for our investors. But as with real estate development, the investment’s fundamentals, not the opportunity zone designation, decide whether we invest or not.

Hampshire’s portfolio includes several redeveloped facilities. How do you approach redevelopment projects compared to ground-up constructions?

Initially, the approach is the same—ensuring that the market is worthy of investment. The main reason we like redevelopments is that the speed in which we can bring the facility to market is faster than ground up and, typically, at a lower cost basis. The challenge is to ensure that the facility meets the market in terms of functionality and customer experience. This is where our experience is crucial, as we have successfully done this at a wide range of buildings in the past and can leverage that experience in each future project.

What can you tell us about Hampshire’s value-add strategy going forward? What about ground-up projects?

We are big believers in self storage and will continue to search in the dense, high barrier to entry markets where we have had past success to find ground-up and conversion opportunities that will drive value for our investors.

Are you considering investing in self storage developments outside the Northeast? If so, what markets are on your list? Why?    

Although we typically focus on the Northeast, we have developed within select markets in Florida with local operating partners. However, the Northeast, particularly the Interstate 95 corridor, boasts tremendous population density and a high barrier to entry, which make it an unparalleled market for self storage investment. These key market features fit ideally within our overarching self storage investment strategy and we continue to see the Northeast as our prime area of focus for the foreseeable future.

What are the key features and/or amenities that a storage facility must include in 2019?

We try to deliver storage facilities with a retail feel: from the access, look and customer engagement. Also, in many of the markets we are looking at, aesthetics are crucial. Since our projects typically fall within mature and established neighborhoods, it is important that the design of our buildings fits within the community and can be seen as a positive addition to a neighborhood.

How do current economic trends impact the self storage business?

The biggest impact we are seeing is an influx of new competitors to the market. Developers need to be very careful of new supply coming into the market when selecting sites. We are also closely monitoring the impact that the new supply has on both occupancy levels and rent growth, which we anticipate slowing. Despite the potential slowdown, we still see tremendous opportunity in the asset class and we look forward to continuing to invest heavily in the development of these spaces.

What are the current challenges in the self storage sector?  

Owing to the strong investment profile of the asset class, the biggest challenge we are seeing is an influx of new developers coming into the sector. This new competition has led to rental rate compression, which drastically impacts underwriting. Thankfully, occupancy growth has remained largely unchanged. 

How do you see the growth of the self storage sector? What should we expect going forward?

Unfortunately, this increase in developer interest will lead to somewhat muted rent growth in the self storage business. I can see many marginal projects suffering from the trifecta of slowing rent growth as well as the increase in competition and rising interest rates. Additionally, regarding the investment sales market, these factors will contribute to REITs continuing to be conservative with new acquisitions. With increased competition and slowing rent growth, proper due diligence will become even more crucial as developers search for profitable self storage projects.

Read the April 2019 issue of CPE.