In March, President Trump placed a tariff on imported steel, which caused the price of domestic steel to rise. Although in the long term, this could be good news for the steel industry and the national economy, in the short term, a number of industries, including sectors in real estate, could experience some difficulties. According to the Globe Magazine, published by the Self Storage Association, steel makes up about 25% of the overall cost of constructing a self storage facility. “Rapid increases in price of such a fundamental input can alter expected returns,” wrote contributor Laura Williams-Tracy in the June 2018 issue.
This means that great news for the steel industry could affect new construction projects already underway in the self storage sector. “Those with projects already underway are caught in a cycle of rising prices and the possibility of being unable to acquire the material quickly, even at higher prices,” Williams-Tracy added. As early as March 3, 2018, steel’s capacity utilization, the amount of production capacity used in a set period, had climbed to the highest rates in three years while analysts predicted it would go higher before the end of the year and reach about 80%, a “healthy” level for the domestic steel industry that that U.S. has not met since before the Great Recession.
Where Does This Leave Self Storage Investors?
With steel costs rising and ongoing projects potentially in peril, self storage investors should keep a close eye on any new construction projects in which they are presently involved. Monitor costs and evolving timelines to determine how your project is going and make sure you are in close contact with the project manager.
You may also want to consider other options for your self storage investing strategies, noted John Manes, owner of Pinnacle Storage Properties in Katy, Texas. “I think [these tariffs] could end up being good for the industry instead of bad for the industry,” he suggested. “The reason I say that is because if you are an owner of storage, it will slow down the development side of things because developers cannot get the returns to work because of the increases in cost of steel. You will not have to worry about someone building right next to you, and it will allow owners of self storage properties to increase current customer rates due to lack of supply and new providers coming into a market.”
Manes added, “A good example of this is the Houston metro area market, which has more than 100 new self storage builds happening right now. The rise in steel prices could cause about 20% of those planning to build to not build, so for people like us, at Pinnacle Storage [which already owns a number of properties in the area], this helps our business remain stable and grow.”