The self-storage market in Dallas continues to expand despite the prospect of oversupply. The industry principle that self-storage is a neighborhood business drawing demand from a three- to five-mile radius continues to stimulate new construction.
Statistics reported in 2017 indicate that Dallas had the greatest amount of supply for self-storage projects both in terms of the number of projects and square footage. Indeed, the second largest market, Miami, was a distant second. At Millman National Land Services, we specialize in ALTA surveys nationwide, including optional ALTA Table A items.
The average size of facilities continues to increase
Several factors have contributed to making new facilities larger. Rising land costs for desirable locations, a shrinking pool of skilled labor, and increasing real estate taxes are compelling developers to build larger facilities to amortize these growing costs.
Notwithstanding these barriers to development, lenders continue to underwrite each project based on its intrinsic market factors. There is a projected 7.7 percent increase in the supply of self-storage nationwide. Self-storage facilities planned in locations where residential growth is robust are still likely to receive financing if they are developed by groups with a proven track record and sufficient equity.
As reported by the industry at the end of 2017, project starts for the self-storage industry overall were at a 10-year high. As measured during this period, the Dallas-Fort Worth market had 164 projects in the following phases of development: 49 in the planning stage, 82 under construction and 33 in some stage of lease-up.
Pressure on institutional owners
The storage REIT sector, comprising approximately 8 percent of the overall REIT market, has been particularly affected by oversupply conditions. REITs accustomed to 8 percent to 9 percent year-over-year growth saw these returns reduced to the 3 percent to 4 percent range. Wall Street analysts have adjusted their projections and share price analysis accordingly, and many REIT shares have fallen from cyclical highs.
But industry fundamentals remained solid into the later stages of 2018, fueled by continued job growth and favorable lending conditions. Market observers note that the Job Openings and Labor Turnover Survey (JOLTS) is an important metric to watch to assess industry trends. JOLTS tracks job availability and labor trends in major U.S. markets.
With a lot of variance within sub-markets in the Dallas metropolitan region, developers are keen on identifying hyper-local employment trends and points of differentiation to attract investors to their projects. There is also pressure to revise rent projections for pro forma purposes. As of October 2018, self-storage rents industry-wide were down 6.6 percent on a year-over-year basis.
Segmentation is gaining traction
In addition to underwriting fundamentals like location, job statistics and developer track record, the self-storage market in Dallas is being driven by amenity packages and market segmentation. Demand for climate-controlled facilities and upscale amenities like wine storage is on the rise.
In a competitive self-storage market like Dallas, well-located and smartly executed projects continue to be in demand for what is essentially a local product that cannot be replicated by a digital transaction. Projects are getting bigger and more refined, and capital is still available for well-conceived new opportunities.
Millman National Land Services welcomes your inquiries regarding ACSM Land Title Surveys, ALTA land surveys, and other developer and lender requirements.
