In the past few years, the self storage sector has gradually become more competitive. The influx of new investors and developers created a challenging environment, making it harder to acquire existing facilities and enter high barrier areas. Continuous delivery of new product hindered rent growth, pushing self storage providers toward an even tougher environment.
Luis Castellanos, director of self storage at Hines, revealed what it takes for a self storage provider to stay ahead of the game in 2020 and shared his predictions for the year ahead.
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Hines launched its self storage expansion strategy in 2018. What were your expectations back then and how do you see the business now?
Castellanos: Hines studied and prepared for several years before entering the self storage market with its first facility adjacent to our Parkside West residential development in Texas. From there, we planned to build a Class A portfolio of properties via development and acquisitions. I believe we had realistic expectations for growth and have taken a measured approach that adjusts based on market conditions.
What were the main challenges in the self storage sector in the past year?
Castellanos: The storage industry is in one of its largest expansions ever. Additionally, we’ve seen a material increase in construction and labor costs in our markets due to tariffs and competition. We’re challenged now more than ever to use our on the ground skills and expertise to compete for and win development sites in high barrier areas and buy existing facilities right. That said, the fundamentals of this product and its risk-adjusted returns are still some of the best in commercial real estate.
What recent trends have impacted the industry the most?
Castellanos: As mentioned, new supply from development has played a major role in this cycle. Another interesting trend is that some municipalities are starting to place moratoriums on new development and others are modifying existing zoning regulations to prevent or restrict new products.
What does it take for a self storage provider to stay ahead of the competition in 2020?
Castellanos: Self storage has moved from the industrial fringes of cities to the centers of neighborhoods. Everything from aesthetics to the level of service provided has changed. To compete, you need to be in the most convenient area with the best-looking building providing the best customer experience using the newest technologies. We provide conference/meeting rooms for customers to discuss their relocation strategies and handling of possessions, enhance the rental experience by providing after-hours kiosks and Bluetooth remote entry, maintain a strong web presence powered by real-time pricing and search engine optimization and are even testing out digital art in our offices to class the place up.
Tell us about Hines’s plans in the self storage business. What are your next projects and goals?
Castellanos: We want to be a relevant player in this industry and build enough scale via development and acquisitions, so that we have the flexibility to build, buy and sell when the time is right. We’re developing relationships with strong partners who will allow us to grow this business with the same principals of quality, integrity and service to our investors that Hines has demonstrated over the last 63 years.
What markets are on your list for self storage expansion in 2020?
Castellanos: Hines is currently focusing on storage in our Southwest region, which includes Arizona, Colorado and Texas. These are great markets with strong fundamentals and rapid growth. We’re still in the early days of proving up our thesis, but we are keen for good opportunities. We expect the business to become broader, particularly in high growth markets, as we demonstrate good outcomes in our current efforts.
What should we expect from the self storage sector going forward?
Castellanos: I believe the storage industry has a bright future. People in all stages of life need storage and are realizing the benefits of having a cost-effective solution for housing their belongings during transitions or as supplemental space to their homes. Now that storage is just down the street and is clean, safe and secure, it makes more sense to use your garage for your cars again.
I think new construction will naturally start to taper off as we get closer to the end of this development cycle and new facilities need time to lease up. In addition, we’ll start to see more acquisition opportunities come to market as merchant builders take their chips off the table and transition facilities to longer-term holders.