Industrial, Multifamily, Self Storage Industries Stare Down Oversupply Issues

John Chang, with Marcus & Millichap, does a good job framing up the state of the self storage market. I'll summarize his main points, all of which I agree with:

• Vacancy is up 1.1% year over year.
• Street rates are down, but rents for in-place customers are stable.
• There is a pipeline of new development, but can it get done?

The article ends with a question: How many new projects will get built with higher cost of capital and higher construction costs? These factors could decrease the feasibility of new development, ultimately reducing new deliveries.  

While I agree, he is missing two factors that could be just as significant. The first is lower leverage available today from construction lenders. 55% Loan-to-cost (LTC) is the new 70% LTC. DXD hasn't underwritten a new development at above 60% LTC in 2023; our average development is more like 55% LTC.

A 10% decrease in the LTC on the average $15 million development is another $1.5 million in required equity. This is not insignificant on top of the fact that the debt is not providing positive leverage for the deal. For investors, more equity means a lower IRR, but with interest rates in the 8%’s and 9%’s, developers cannot hit the debt service ratios at 65% LTC, which were typical until this year.  

Secondly, the article does not mention how much equity is on the sidelines. Most institutional players are not active. They have money but are too afraid to make a mistake or to invest as the market is declining. That’s a lot of dry powder. We know that institutions cannot turn on the equity spigot as quickly as private equity can, so they will be slow to return to their average investment allocations. 

John's facts and quotes about the industry are good, but the GlobeSt article title is not.