CISL SELF-STORAGE ANNUAL REPORT 2016
MARKET INSIGHTS SELF-STORAGE

Development and Construction Starts:
Baltimore & Suburban Maryland, Washington DC, and Northern Virginia

New Self-Storage Construction and Development Starts reach a new high. Reflecting self-storage development activity for the past 2 years there are self-storage sites in this market area that are under contract, and are either in various stages of jurisdictional review, under construction, or have open for business. The breakdown of these sites are as follows: are in various stages of jurisdictional review, appear to be viable and are expected to be built; are under construction, and are open for business. This accounts for  of the sites. The remaining sites are in various stages of evaluation and jurisdictional review and their viability and status is yet to be determined.

Self-Storage Development Sites (Revised August 18, 2016)

Baltimore & Suburban Maryland			Northern Virginia			Washington DC
Anne Arundel County	12		Alexandria	1		NE	4
Baltimore City	0		Arlington	1		SE
Baltimore County	5		Falls Church	1		SW
Frederick County	3		Fairfax City	1		NW
Harford County	2		Fairfax County	4
Howard County	2		Herndon	1
Montgomery County	7		Leesburg	1
Prince George’s County	5		Loudoun County	16
			Prince William County	7

	Total Sites	Expected TBB	Under Construction	Open
Baltimore & Suburban Maryland		17	5	4
Northern Virginia		20	2	6
Washington DC		1	1	2

After the Great Recession of 2009, a few years of minimal self-storage development has created an unsatisfied pent-up demand for self-storage development sites. Exponential population growth has been rising faster and has outpaced construction starts for new self-storage development. The amount of rentable SF of self-storage per person has declined with rental rates stable or increasing. The national average is 8.3 SF of self-storage per person; Maryland is below to national average at 4.7 SF per person, Washington DC at 4.1 SF per person, and Northern Virginia at 6.0 SF per person. A window of opportunity presented itself for self-storage. Low interest rates and record amounts of capital are chasing self-storage sites. development sites located in Baltimore & Suburban Maryland, Northern Virginia, and Washington DC are in various stages of acquisition, development, or are open for business.  After the initial gold rush, the pace of new self-storage development activity is slowing, due to the lack of prime self-storage sites, and the saturation of self-storage along and in prime corridors. However, there remains more buyers, then there are sites in this market area. Loudoun County, Virginia, and Prince William, Virginia appear to have reached the saturation point for rational investment in new development activity. Washington DC, and Northern Virginia display a higher barrier to entry and remain underserved.

At present new supply is not impacting fundamentals. As the record volume of self-storage development activity comes online in the next few years, market analytics will determine if supply becomes greater than demand. The abundance of capital, overbuilding, higher interest rates, and refinancing are the uncertainties on the future horizon.

Breakeven Occupancy:
Breakeven Occupancy and Absorption Lease-up time go hand-in-hand. The unprecedented influx of new self-storage development is at record levels, and may impact the absorption lease-up time and ultimately the breakeven occupancy rates. The breakeven occupancy rate for self-storage historically has been in the range of 45-55%. As absorption times increase and do not meet pro forma expectations, unit rental pricing wars between the competition may emerge until the self-storage facilities reach stabilization.

Average Unit Size….. Unit Mix….. Absorption Lease-Up:
As the competition increases for self-storage development sites in high barrier to entry markets, and land prices escalate, analysts performing pro forma Self-Storage analysis are being challenged to meet the benchmark self-storage yield range for projects. Historically the yield range is a minimum of 11%, with some self-storage entities accepting a yield as low as 9% for exceptional sites. Caution is the word to analysts who are stretching the envelope and are no longer being conservative but aggressive in their pro forma analysis by using future rents instead of current rents, using a smaller average unit size, a skewed unit mix in favor of smaller units, and an absorption lease-up time that is not reflective of the number of units and market conditions. Decreasing the average unit size results in an increased number of units. A skewed unit mix that is geared toward an increase in a greater number of smaller unit sizes produces a greater return per square foot than larger units. Given that a certain number of smaller units and self-storage lockers are appropriate in any unit mix the appropriate average unit size and unit mix is critical in achieving the shortest absorption time.

Property Taxes: Underestimating Future Property Taxes:
Many jurisdictions initially in the first few years of operation base the property taxes on the actual cost of construction receipts to build the project. Once the project passes breakeven occupancy and achieves stabilize occupancy, the project’s taxes are calculated on the income approach.

Impact Fees; Do Your Homework:
Jurisdictional Impact Fees for adequate public facilities are another factor affecting the pro forma bottom-line. In one jurisdiction, the impact fee is $6.06/GSF, and includes all below and above grade construction. A 100,000 GSF facility therefore would have an impact fee of $606,000, plus additional fees for each site submission and departmental review. This is a serious line item in addition to the normal utility, site inspection fees, bonding, building permit, and other fees.

Absorption Lease-Up:
Absorption Lease-up time is a variable that is highly dependent and affected by a number of factors to include:

• Location, visibility, ingress-egress, safety, security, and lighting;
• Facility image and cleanliness; personnel and customer service;
• Population and income demographics in a 1, 3, and 5 mile radius, with greater weight emphasis given towards the 1 and 3 mile radius;
  The percentage of renters and condominium owners;
  The percentage of the population with a median household income over $45,000.
  The age of the population;
• Proposed and existing competition;
  Rentable Self-Storage per Capita;
  Rental rates and unit mix;
• Marketing and call center sophistication;
  Unit pricing algorithms;