Jernigan Capital Provides Commentary on New Self-Storage Supply
—Believes Self-Storage Sector Headed for Soft Landing—
Jernigan Capital, Inc. (NYSE:JCAP) today provided commentary on growth in self-storage supply in the top 50 US MSAs. John A. Good, the Company’s President and Chief Operating Officer, made the following observations:
“Based on US Census Bureau data, between 2010 and the end of 2014, estimates are that between 250 and 285 new self-storage facilities (17.5 million to 20.0 million net rentable square feet) were delivered in the top 50 US markets, representing approximately 2.1% cumulative growth over the five-year period (less than one-half of a percent per year). During that same five-year period, population in these markets grew at an annual rate of approximately 1.0% rate (approximately 5.1% cumulative growth over the five-year period). In addition, people impacted by the Great Recession moved into rental or smaller owned housing, with single family home ownership declining from approximately 67.4% in 2009 to approximately 63.7% in 2015. Population growth, movement from single-family to multi-family housing and a slowdown in new self-storage deliveries during this period created a backlog of demand that only new development could fill. These dynamics also provided existing self-storage owners (particularly the self-storage REITs) with an unprecedented period of same-store revenue growth during the period from 2014 through mid-2016.”
Good continued: “Leaders in the sector knew that compelling revenue growth and a discernible shortage of self-storage space would eventually lead to new development. The only question remaining was who would develop how much new product, how quickly and where. Would developers have adequate net worth following the financial crisis or adequate access to affordable private equity capital? Could developers obtain cost-effective debt in large enough amounts to entice them into the game? Would municipal gatekeepers entitle and permit projects in urban infill locations such that developers could build where their customers were moving? Or, to the contrary, would capital market and governmental forces temper overbuilding and allow for an orderly return to supply/demand balance?”
“Beginning in late 2015, the narrative grew louder that the self-storage supply/demand pendulum had begun to swing. Commentary on the sector turned bearish, and predictions of broad-based overbuilding became the norm among both securities industry professionals and some self-storage executives. At the time, our management team knew that development activity was increasing (significantly in some markets). However, we continued to experience a steady flow of development opportunities in submarkets that continued to be underserved even in the face of new supply. Moreover, unlike in past development cycles, we saw a more sophisticated developer effectively engaging with municipal authorities and capital providers. We saw these dynamics as a sign that things might not be as bad as the “experts” were saying, and we continued to invest in new development.”
Throughout 2017, JCAP’s analytical team and senior management has devoted substantial time and manpower in reviewing, analyzing and testing data provided by the various sources of market and supply information to the self-storage sector. Based on data provided by Yardi® Matrix and the US Census Bureau, the Company believes that during the two-year period January 2015 through December 2016 a total of approximately 29.7 million net rentable square feet of new self-storage (438 facilities) was delivered in the top 50 MSAs, representing an aggregate 3.3% increase over total supply in these markets at the end of 2014. Based on the same sources, the Company estimates that in the top 50 MSAs, 2017 deliveries will total approximately 27.0 million net rentable square feet (337 facilities) and 2018 deliveries will total between approximately 28.0 and 29.0 million net rentable square feet (between 350 and 362 facilities), representing increases of approximately 2.9% and 3.0%, respectively, over total supply as of the end of the immediately preceding year. By contrast, some industry professionals have gone on record predicting as many as 900 deliveries nationwide in 2017 alone. For purposes of estimates, the Company has assumed that facility size increased from earlier in the cycle to an average size of approximately 80,000 net rentable square feet.
Good stated: “The data indicates that rumors of the demise of the self-storage sector due to excessive new supply are wildly exaggerated on a national level. Our analysis indicates that estimates of new supply suggested by some within the sector could be as much as 80% overstated. In addition, we believe the development cycle began in 2015 with pent up demand from the 2010 to 2014 period, when population growth and people leaving single-family housing significantly exceeded new self-storage deliveries. The combination of pent up demand, continued strong population growth in excess of 1% per year and increased mobility of families and millennials can be expected to produce orderly absorption of new supply in general. We have continued to monitor access to financing and governmental activity throughout the cycle. We believe banks have not broadly embraced self-storage construction lending due to stricter banking regulations following the financial crisis, excess reserve requirements imposed on high volatility commercial real estate (“HVCRE”) loans under the Third Basel Accord and loan demand from other real estate sectors that have less leasing risk. Moreover, as evidenced by municipal initiatives regulating self-storage development in large cities such as New York, Miami, Atlanta and Seattle, we believe zoning for self-storage and permitting projects has become a significantly more challenging endeavor for developers. Accordingly, we believe a significant percentage of planned projects will never be built.”
“Despite our longer term bullish view on national self-storage supply/demand dynamics, we continue to believe that some trouble spots exist and are encouraging our developer partners to either avoid these markets or proceed with extreme caution, looking only for the “diamonds in the rough.” Currently, our Danger and Watch Lists include:
Our Danger List consists of markets that we believe present a higher risk of longer-term absorption issues and softened rates. Our Watch List consists of markets we believe bear watching due to a higher risk of short-term absorption issues and rate pressure resulting from the cumulative effect of new supply being delivered in a compressed time period (2016 through 2017), but that we believe have plenty of depth and population growth to absorb this supply over a relatively normal stabilization period. Despite these markets being on either of JCAP’s two lists, we continue to believe that self-storage development is a submarket specific art within the science of measuring supply in broader markets, and we have invested in, and continue to find, compelling projects in certain submarkets in some of the MSAs on our Danger and Watch Lists.”
Good concluded: “After months of talking to developers, analyzing data, monitoring activity, underwriting investments and challenging the conclusions of many commentators, we are projecting that the development cycle is in a two-year crest, with 2017 and 2018 deliveries projected to be roughly equal. We believe fewer projects are going into planning than in the past three years and a significant percentage of planned projects have a strong likelihood of being abandoned. Moreover, we project that deliveries will decline significantly in 2019. We believe the market will absorb the 2016, 2017 and 2018 deliveries in an orderly way, with a relatively short-term pressure on rates. In short, if the sector continues the current trajectory of new starts, we are expecting this development cycle to end with a soft landing in 2019 and 2020. In our view, this is good news for the entire sector and should generate a renewed optimism about longer term returns on investments in self-storage, which returns have on-average led the real estate industry over the past 23 years. Likewise, Jernigan Capital should continue to benefit from strong lease-ups of its development investments and good opportunities to own top quality assets in balanced markets over the longer term.”
About Yardi® Matrix
Yardi® Matrix, formerly known as Pierce-Eislen, Inc.®, was founded in March 2000, and acquired in July 2013 by Yardi Systems, Inc., a Santa Barbara, California software company focused on commercial real estate industry applications. Yardi® Matrix offers the self-storage industry’s most comprehensive market intelligence. Yardi® Matrix Self Storage is used for originating, pre-underwriting and managing assets for profitable loans and investments. We are active in 133 self-storage markets across the U.S., providing researched data on more than 27,000 self-storage facilities of at least 25,000 square feet in size, including over 1,600 projects in some form of new supply.
For more information about Yardi® Matrix, please visit https://www.yardimatrix.com/.
About Jernigan Capital, Inc.
Jernigan Capital, Inc. is a New York Stock Exchange-listed real estate investment trust (NYSE:JCAP) that provides debt and equity capital to private developers, owners, and operators of self-storage facilities. Our mission is to be the preeminent capital partner for self-storage entrepreneurs nationwide by offering creative solutions through an experienced team demonstrating the highest levels of integrity, dedication, excellence and community, while maximizing shareholder value. The Jernigan Capital team has extensive experience in over 100 U.S. markets—from acquiring and managing self-storage properties to new self-storage development—providing JCAP with knowledge unmatched by any lender, broker or advisor to the sector. Jernigan Capital is the only source of construction and development capital focused solely on the self-storage sector.
This press release includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The ultimate occurrence of events and results referenced in these forward-looking statements is subject to known and unknown risks and uncertainties, many of which are beyond our control. These forward-looking statements are based upon the Company's present intentions and expectations, but the events and results referenced in these statements are not guaranteed to occur. Investors should not place undue reliance upon forward-looking statements. For a discussion of these and other risks facing our business, see the information under the heading “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) and our other filings with the SEC from time to time, which are accessible on the SEC’s website at www.sec.gov.