STATE OF THE INDUSTRY

STATE OF THE INDUSTRY 2020

MARKET HIGHLIGHTS: DEMAND DRIVERS

The Market section of State of the Industry 2020 explores the self storage market, examining trends in demand and supply across the industry. This edition dives into industry demand and showcases the Storage Industry Gauge, created specifically for the industry to track the state of the market over time.

At a macroeconomic level, strong levels of population and dwelling approval growth have been underpinned by strong levels of overseas migration over recent years. Average income growth has been slightly lower than GDP growth, however unemployment had generally been trending down, with the initial impacts of COVID-19 resulting in a spike in unemployment.

As population growth and dwelling demand slows, and unemployment rises over the short term, this could potentially lead to softer levels of demand for self storage facilities over the short to medium term.

Across the industry, key demand drivers for self storage are known as the Four D’s and include density (population growth and living density), divorce rate, death rate and displacement.

Population density has been growing solidly across major capital cities over recent years, however the sharp drop in forecast population growth over the short to medium term due to the impacts of COVID-19 will likely result in only modest change in population density. Any reduction or slowing in high density residential development over the coming years may have an impact on self storage demand.

Interstate migration could be reduced over the short term, with Queensland and Victoria having benefited over recent years in attracting positive levels of interstate migration while Western Australia and New South Wales have lost population interstate. A slowing of housing turnover may have an impact on self storage demand as has been demonstrated in previous market downturns.

Divorce rates and death rates drive demand for storage given the changes these life events present to personal circumstances. Over recent years, divorce and death rates have remained relatively stable, with some moderate decline across certain geographies.

Severe weather events have been the main driver behind spikes in displacement levels across Australia and New Zealand over the past five years.

In terms of demand driven by the housing market, the Australian market had been performing modestly over the past two-three years, with Sydney and Melbourne having peaked around mid-2017. Strong population and employment growth, along with a favourable interest rate/ lending climate and strong buyer sentiment had been key drivers over the second half of 2019, however transaction levels and price growth had been moderate. The impacts of COVID-19 will be absorbed differently across different markets – for example, the lack of overseas migration is expected to impact apartment and town house product in capital cities, with Sydney and Melbourne having the greatest exposure.

Self storage is traditionally a resilient asset class, and whilst the full impacts of COVID-19 are still to be seen, many operators are reporting positive signs on the demand side that indicate the industry remains resilient.

Across the industry, key demand drivers for self storage are known as the Four D’s and include density (population growth and living density), divorce rate, death rate and displacement.

WITH THANKS TO OUR GENEROUS INDUSTRY PARTNERS:

MARKET INFLUENCES OVER TIME

One of the key objectives of State of the Industry 2020 was to bring together macroeconomic trends and industry demand drivers and overlay them with real industry insights to understand their influence on operating performance. Over time, macroeconomic and industry specific trends have had varying effects on the self storage market as explored here:

2017 The continued strength of the economy and healthy residential property market across most markets continues to drive revenue growth. Increased competition saw the emergence of fee concessions (eg. one month free or second month half price).

2018 A spike in new self storage supply intensifies the competitive landscape and the use of fee concessions. Demand is strong in major cities likely to be fuelled by a high volume of new apartment releases to the market. ‘Other Income’ revenue starts to decline.

2019 Fee rate growth begins to slow, new self storage supply increases competition and macro demand drivers soften. . ‘Other income’ revenue continues to decline as alternate retailers increase storage merchandise sales. A record year for transactions continues to compress capitalisation rates.

STORAGE INDUSTRY GAUGE

As part of State of the Industry 2020, the Storage Industry Gauge was developed to visually represent the current state of the self storage market, reflecting the condition of the economy, the strength of traditional demand drivers and the impact of supply.

Key drivers such as population growth, unemployment rate, average household income growth, residential sales turnover, new apartment completions and self storage supply have been correlated to the 10-year performance trend in self storage revenue across East Coast Australian capital cities. A downward trend in the market score has been apparent, with the impact of COVID-19 on macroeconomic drivers influencing the 2020 score.

Looking forward, a shift in economic performance will improve the result, including a strengthening of residential sales turnover, an increase in new apartment construction, a reduction in new self storage supply and a recovery of projected population growth – all of which showed the strongest correlation to revenue growth performance.

The Storage Industry Gauge will be regularly updated over time as an indicator of market performance.

The next edition will explore new supply, the impacts of industry consolidation and development across the industry.

State of the Industry 2020 highlights changing fundamentals in an industry full of opportunity. l

To read the full report and discover insights and opportunities for your business, login to your SSAA member portal.