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SPRING CONFERENCE & TRADE SHOW
Demand for Self StorageMarcus & Millichap’s Hessam Nadji to share data, insight as keynote speaker in Dallas.
By Laura Williams-Tracy
The economic outlook for self storage in 2016 doesn’t hold many caution signs or speed bumps, but new development threatens to make the road more crowded into the future.Hessam Nadji, senior executive vice president of Marcus & Millichap and the keynote speaker at this month’s SSA Spring Conference & Trade Show in Dallas, says the good times storage has enjoyed over the past three years are expected to continue through this year. Nadji, a frequent contributor to The Wall Street Journal, Financial Times and NPR, oversees the company’s national specialty brokerage divi-sions, including self storage, along with its mortgage brokerage divi-sion and research and advisory services. A national apartment building boom, strong for-sale residential market, jobs growth, low energy prices and still low interest rates paint a positive picture for storage owners this year as the economy’s gradual recovery doesn’t yet show signs of petering out. It’s a time for storage owners to push rental rates, ditch free rent or other concessions and keep an eye out for possible competitors as development increases.
“Owners have more pricing power today than they’ve had through the entire recovery,” said Nadji, a 30-year veteran of commercial real estate. “That doesn’t mean they have unlimited pricing power, but owners should ask if they have rent-growth opportuni-ties and the ability to attract tenants instead of giving discounts. And being able to rely on renewals should result in healthy revenue growth.”The self storage industry is balanced and attractive to new investors, Nadji said.
“There are so many positive indicators,” he said, “and the question is, ‘Can it last?’ We believe based on moderate growth economically, including the same job growth numbers of 2 to 2.5 million new jobs as in 2015, there will be plenty to spur demand for new storage space.”
New SupplyMore projects are being planned, permitted and opened, but Nadji says he doesn’t see industry-wide overbuilding.
“Over the next three to four years, we will see a lot of new product. 2016 won’t be an overbuilding year, but in some markets by 2018 they may see more construction going on.”
Hadji said owners should look around and see how vulnerable they are to new development nearby. As the growth cycle extends, devel-opment decisions become more difficult. Meanwhile, plenty of capital continues to chase storage deals. Many developers who’ve made money developing and owning apartments or hotels are coming to storage, using 1031 Exchange deals to defer taxes when swapping old apartment investments for new self storage investments.
“The 1031 is providing arbitrage for apartment owners,” Nadji said. “If an apartment owner in the Bay Area sells for a 3.5 percent cap rate and invests in a B-quality self storage facility in the Midwest and yields 6 to 7 percent, that’s still very attractive. Storage has become a far more acceptable investment vehicle.”
Across the country, apartment buildings are going up at a pace unseen in decades. This urbanization of America, as millennials and others seek to live closer to urban cores and flexible enough to chase new jobs, has created a boom in the rental market.
“All of this is causing movement, which means demand for storage,” Nadji said. In fact, all trends in housing, including for-sale housing and strong demand for new housing, have been good for self storage.
“The question becomes, ‘Are we going to overdo it?’” he asked.
See Keynote, page 18
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Keynote, from page 16
See Keynote, page 20
Nadji says homes are appreciating at 5 to 7 percent a year, a reasonable rate that doesn’t tend to overheat markets.
“For-sale homes are in a sustainable cycle, and apartment absorption is strong. That means people are moving, and that bodes well for storage demand.”
Pace of DealsNadji has overseen Marcus & Millichap’s specialty brokerage divisions since 2010, and in 2014 the divisions closed $19.7 billion in sales. Capital continues to come into the storage market.
“We are seeing so much demand for product. The buyer pool has not thinned out, but it is more concerned about valuations and rent growth and the balance between the two,” Nadji said. “Cap rates have recompressed, but the good news is rent growth still has legs.”Nadji will have year-end 2015 data completed at the Dallas conference to offer attendees a full glimpse of the number of storage deals completed last year, their price range and the average cap rates.Analysis of real estate data and how it can drive investment decisions and even differentiate brokers drew Nadji into the industry 30 years ago. Thinking he’d one day aspire to be a chief information officer, Nadji majored in informa-
tion management and computer science at City University in Seattle. He joined Grubb & Ellis Co., while he was still in school. As a technology specialist he took a greater interest in what the data was showing—tenant information and how those rent rolls impacted the value of the property—than in computerizing the information. He began to create reports for brokers to take on the road. He soon carved a career for himself using data to increase sales and building a brand by providing market information and leveraging that market research to do a better job for the client.Nadji joined Marcus & Millichap 20 years ago as head of research and was soon overseeing marketing. Five years ago he began to oversee different sales units and grew those business lines. Today he’s responsible for all of Marcus & Millichap’s product groups.
Greatest ThreatThe greatest threat to the industry is the economy slipping back into a recession, something that doesn’t seem likely in 2016.
“The economy still has legs, because the recovery was so gradual,” Nadji said. “There’s not a lot of wage pressure. Oil prices are at 11-year lows, which helps the consumer. We don’t anticipate a recession around the corner.”
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Any self-inflicted wound to the industry would come from overbuilding in certain submarkets, Nadji said. But any such scenario isn’t likely in 2016.
“The wildcard is how much building beyond 2016 is too much? You could build a lot of units and absorb them if the economy continues to do well.”By next year and the year after, the U.S. economy will have been in one of the longest sustained expansions in its history. The nature of economic cycles tells us that a slowdown will come eventually. Unfortunately, construc-tion is usually hitting its peak when the economy softens.
“By 2017 or 2018 the economy will be more in question, because of just how long a growth cycle can last,” Nadji said. “That’s when more units will be coming out of the ground.”Of course, no one expects any pending recession to be as severe as the 2008–09 recession, which wiped out nine million jobs on the heels of a tremendous building boom.
“I think we will have some speed bumps in 2017–18 on a local basis due to over-building, but the industry is not facing a massive time bomb of sorts,” he said. v
For more on the SSA Spring Conference & Trade show, visit selfstorage.org.
Keynote, from page 18
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