As we approach the midpoint of 2023, self-storage investing continues to be a very compelling opportunity, offering attractive returns and a steady income stream. Self-storage investments have gained popularity due to their resilience in economic downturns and the public’s continued demand for storage space. It is clear that as the overall economy and capital markets continue to be volatile, the self-storage investment market may be bumpier that we once thought. However, performance remains strong.
IV-2023: Self Storage Market Trends
Over the last two months the industry has gathered at two national self-storage meetings and in my 20-year career I have never seen a market that is more unsure of the direction it is heading. The self storage market is a classic tale of two cities. There are both headwinds and tailwinds, making it challenging to predict the future. Below I have outlined some self-storage trends to help you identify your next opportunity.
Strong Occupancy Levels:
All five self-storage REITS reported 90%+ occupancies at the end of 2022. Starting in June of 2022 we started to see street rates fall as the REITS and other large operators observed larger than normal move out velocity and started cutting rental rates to maintain occupancy. Many of them set occupancy goals to be in the low to mid 90’s by the end of the year, which is in sharp contrast to a revenue-centric approach over the last 10 years. This has been successful as the REITS and large operators have continued to maintain low to mid 90% occupancy, while maintaining meaningful revenue growth, albeit at lower new customer rental rates. In just the last 30-45 days we have started to see street rents firming up and, in some markets, rise.
III-2023: Who Is Swimming Naked?
The uncertainty of the financial markets over the last 30 days has had everyone on pins and needles waiting for the next shoe to drop, and it is clear that the recent bank failures have yet to fully work their way through the system, and may only be the tip of the iceberg. One certainty is that the value of self-storage properties is changing as equity providers and investors are looking for appropriate risk-adjusted returns and safe havens. The main take away from our most recent market participation is that there are still very willing buyers in the market, but the question
II-2023: Here Comes Leasing Season
While the last few years have been very good for the self-storage industry, the most positive and productive result of the contracting economy and return of seasonality over the last 6-9 months is that it has forced operators to take a very hard look at their operating expenses, leasing velocity, and move out trends. The slowdown in leasing velocity and declining rental rates have forced many operators to change their marketing campaigns, embrace revenue management, and move outside their comfort zone as this market continues to evolve. Today’s savvy self-storage owner/operators must familiarize themselves with a variety of online marketing and revenue management techniques such as geofencing, upstream clicks, social media, negative churn, tenant acquisition costs, algorithm-based pricing models, pay by text, and length of tenancy, just to name a few. Gone are the days of simply “having a website” and rolling out street rate adjustments and existing customer rate increases annually or semiannually. Not only are self-storage owner/operators finding better and cheaper ways to communicate with their customers, but customers are choosing to receive information and make rental decisions in a more convenient way as well.
I-2023: Cautious Optimism
As we enter 2023, it is clear that investor sentiment towards self-storage continues to be very bullish. Economists, on the other hand, prognosticate that rising interest rates, inflation and overall economic concerns continue to teeter on recessionary levels. Today stabilized assets are continuing to command very aggressive valuations and undermanaged deals are the golden ticket that everyone is searching for, while lease up and C of O deals are regaining momentum and pricing power. This reinforces that once again self-storage will emerge from a market disruption as the shining star of commercial real estate, largely driven by current self-storage market fundamentals and risk-adjusted rates of return compared to other asset classes along with self-storage’s low capital expenditures.
XII-2022: What’s in Store for 2023?
By Ben Vestal
As we close out 2022 and reflect on the ups and downs of the self-storage investment market, it is now time to turn our sights to 2023. This month, Ben Vestal shares his predictions for the new year and the opportunities that self-storage investors should be on the lookout for.
XI-2022: A Note of Thanks!
By Ben Vestal
What a year 2022 has turned out to be! First and foremost, it is our hope that you and your families stay safe and healthy during this upcoming holiday season. This time of year, we find ourselves reflecting on the things that we are most grateful for and the people who mean the most to us. Argus Self-Storage Advisors is made up of more than 50 self-storage professionals around the country who have been helping their friends, colleagues, and clients navigate the self-storage investment market for the last 28 years.
Over the past 12 months we have seen the performance of the self-storage sector accelerate. In the first half of the year values had never been higher, and as we close out the year, we are experiencing rapidly rising interest rates and softening values for the first time in more than a decade. This paradigm shift in the market has all of us reevaluating our business models and investment goals to make sure our investments excel in this changing environment. We are all very thankful that we are in the self-storage industry and below I have outlined a few market observations that set us apart from other commercial real estate and that I am very thankful for.
X-2022: It’s Gut Check Time!
In these very uncertain times, many owners are giving some thought to selling their property rather than waiting out the market. As we all know, trying to squeeze out every last penny comes with the risk of going on the always bumpy ride of the next real estate cycle. Real estate prices have been gradually increasing over the last several years and self-storage has continued to be the shining star of “niche” real estate sectors. In this time, we have learned that there is a material difference between “thinking about selling” and becoming an actual seller. Eventually, almost everyone will end up being a seller and it is a matter of when that concerns most owners. Thinking through the following factors will help you determine how close you are to actually becoming a real seller which will help maximize your investment returns. Now is a time to be smart, not emotional.
IX-2022: Not All Bad News!
For the last several months the industry has been abuzz about the uncertainty of the real estate markets. By most measures, the self-storage rental business is reasonably steady and as we approach the fourth quarter, I feel it would be appropriate to share with everyone what we are seeing in the market today. As you know Argus has been entrenched in the self-storage industry for more than 28 years, has roots in investment sales and manages one of the largest third-party management portfolios in the industry. This industry reach gives us a unique real time look into the operations and valuation of self-storage properties around the country.
VIII-2022: An Open Letter – This is Different!
I am writing this letter to give you my absolutely unvarnished thoughts on today’s real estate market and what I believe are an owner’s options in the market today. The options are difficult and limited today because the market is rapidly changing and unusually bifurcated with buyers and sellers viewing the investment world through two totally different sets of lenses. As Q2 2022 ended, I began to think that there was something quite different about this “slow down” as it was beginning to unfold. The self-storage real estate market that had preceded the now accelerating slowdown was and continues to be dramatically resilient compared to other CRE assets and to any previous market. In the first half of 2022, prices were at record highs both nominally and in relation to the incomes of the properties (i.e., extremely low cap rates). This was largely fueled by the large amount of liquidly in the market, strong market fundamentals, and aggressive financing that was available until about the first of June. The market has changed and is now different! Owners must all remember that even though your self-storage business is very resilient, the greater real estate market has more to do with self-storage valuation than the performance of your asset.
VII-2022: Riding the Valuation Roller Coaster
It has been a wild ride this summer with economic uncertainty and market sentiment creating a roller coaster for self-storage valuations. However, I am not confident that the run-up in real estate values is over yet. We have seen a 200-250 basis point uptick in interest rates over the last 3 months and shockingly, cap rates seem to still be holding steady. Please forgive my optimism, but I think that self-storage fundamentals are strong, and the increase in value that self-storage owners have enjoyed over the last few years seems to be holding steady as NOI growth seems to be outpacing inflation for the time being. While I would agree that many elements of the economy appear to be unstable, the confidence of self-storage investors seems to be resilient for the time being. Sounds like good news – and it is, for now!
VI-2022: The Market Has Changed!
As readers of the Market Monitor have come to know, I think that low interest rates have been the best friend of self-storage owners over the last decade. It now appears that the long downward trend in interest rates has turned and rates are now heading upward. In the late spring and early summer rates for real estate loans, including self-storage, were literally at 50-year lows. Many real estate investors have gone through very long careers and never experienced these historically low interest rates and high valuations. While predicting the future of interest rates is not a high percentage game, I think it is safe to say that in the short to intermediate term it would be reasonable for interest rates to continue to trend up, pushing self-storage values down. Yes, there is a new sheriff in town! It is rising interest rates and inflation. Like many of you, I have been watching the stock market and treasuries closely over the last few weeks and the uncertainty that surrounds the economy and how we are going to curb rapidly rising inflation has never been more pronounced.