Market Monitor

We have reached the time of year when we reflect on the lessons learned in 2024 and set our sights on 2025. Without question, 2024 proved to be a very challenging year. There was real anxiety related to soft market fundamentals, rising interest rates which made most investment reports irrelevant, and pricing discovery on every deal. In many ways, 2024 was not that much different than 2023.  What we do know is that the investment market has continued to evolve and the overall outlook for 2025 is cautiously optimistic.  Over the last 3-6 months the Fed has started to cut interest rates and provided insights into potential future interest rate cuts for the coming year. However, the impact of the Federal Reserve’s rate cuts on the self-storage industry will be minimal at best and will not have an immediate impact on cost of capital to self-storage investors or property valuations.  But it will have an impact on consumer confidence and market sentiment while also having a trickle-down effect to self-storage customers.  We have also started to see improvement in leasing velocity and rental rates seem to be stabilizing according to Yardi, but it is too early to tell if the market has bottomed.

This time of year, we find ourselves reflecting on the things we are most grateful for and the people that mean the most to us. Argus Self Storage Advisors is made up of more than 500 self-storage professionals across our management and investment sales platforms who have been helping our friends, colleagues and clients navigate the self-storage management and investment market for the last 30 years.

As we approach the end of 2024, many self-storage operators are experiencing occupancies at the lowest levels in many years. The reality is that today it’s not about getting the rental, it’s about taking the rental away from your competitors. It has been well-documented that there are 10%-20% fewer storage customers in the market today than there were 12-24 months ago and the large operators are spending more to capture every rental that they can. Operators are at a crossroads with the decision on what to prioritize, and it is clear that the REITs are prioritizing occupancy over revenues in today’s market. Their thesis is that self-storage customers are sticky and will continue to absorb very aggressive existing customer rate increases, and when demand comes back and rental rates start growing again, they will be ahead of the game with higher occupancies. This will allow them to drive revenues higher and faster with their larger existing customer base. The question today becomes: is achieving higher occupancy at lower rental rates worth the reputational risk and monetary cost?

Real estate brokers are often thought of as marketers, salesman, promoters, etc. However, the quality of a real estate broker is often revealed in the details as they assist their clients during due diligence. Many brokers may forget that the minutiae associated with a complex real estate transaction may be quite unfamiliar to their clients (buyer & sellers) when they decide to buy or sell self-storage properties. With this in mind, I thought I would take you through some of the behind-the scenes aspects of a real estate transaction and focus on the structure and due diligence requirements. Obviously, the devil is in the details when buying and selling a self-storage property, and keen attention to the process can separate the winners form the losers.

How to handle unsolicited offers for your self-storage property.

In the dynamic realm of self-storage and commercial real estate, property owners often receive unsolicited offers, not from the end buyers, but from individuals known as “bird dogs”. These bird dogs identify potential investment opportunities and present them to investors or real estate professionals for a fee or commission without an exclusive agreement with the buyer or seller. Similar to hunting dogs that locate birds for hunters, their role involves spotting promising properties—often undervalued or underperforming—and bringing them to the attention of interested buyers. Understanding who bird dogs are, their tactics, and how to handle unsolicited offers is crucial for protecting your investments and maximizing their value.

Today’s real estate markets, including self-storage, are slower than in years past. Much of what you hear today is all about interest rates and what the Fed is going to do next. Sellers are hoping to get yesterday’s prices and most of the buyers today tend to be very experienced self-storage owners/operators who are being much more disciplined with their underwriting. Thus, the market for buying and selling self-storage is slower and more difficult these days. How long will it last? History tells us that real estate cycles are almost always longer than we expect, and the normal cycles are usually about three to seven years. But is the current market, and coinciding interest rate environment, really that bad?

In today’s investment market, the main concerns on everyone’s mind are the upcoming election, a possible uptick in inflation, and whether the Fed will cut interest rates this year. It comes as no surprise that inflation has been rising for the last 12-24 months with only moderate indications that the Fed raising interest rates has helped control it. While no one knows what the future will bring, it is wise for real estate investors to understand how real estate will be affected and how to best position your investments to hedge during an inflationary time.

The doldrums are certainly present in today’s real estate markets, including self-storage. The winds are quiet. Sellers are hoping to get yesterday’s prices and most of the very aggressive buyers of the past few years are long gone. The remaining buyers tend to be very experienced self-storage owners and they are being very cautious. Thus, the market for buying and selling self-storage is slower and a lot more difficult these days. When sailors hit the doldrums, they all knew it was just a matter of time before the winds picked up again, but they also worried which way the wind would blow them when it started. Interestingly, that is also the case with the self-storage investment market today. The major questions are: when will the wind blow, in which direction will it blow, and how strong will it be when it comes? History tells us that real estate cycles are almost always longer than we expect, and the normal cycles are usually about three years depending on the location. However, brutal experience reminds me that they can last much longer.

It has been well-documented that self-storage REITs have pushed street rates down in recent months, and we are now seeing evidence that the so called “race to the bottom” is clearly affecting self-storage valuations and performance. Today unit pricing and Existing Customer Rate Increase (ECRI) programs have more to do with the success or failure of a project than ever before. In some markets we are finding that REIT-operated properties have street rates as much as 50% lower than non-REIT operated properties. This has allowed REITs to steal occupancy from the smaller operators that are slow to respond. However, when you dig into the unit pricing strategy of the REITs, it is much more complex than just lowering street rents.

It certainly appears to us that there may be some real opportunities for experienced self-storage owners to pick up some nicely priced, quality built, well-occupied properties, earn a handsome cash on cash return, and yet have significant upside potential when the market improves. However, it is not a time for amateurs! You really need to understand the self-storage business to be sure that the underlying business value is there.

The turbulence in the capital markets and general economic uncertainty over the last year had many self-storage operators adjusting their tactics to maintain occupancy and revenue.  This month, Ben Vestal shares some strategies that the industry’s most sophisticated operators have employed during these difficult times and ways that smaller operators can keep pace with the ever-changing operational landscape.

The new year has brought a feeling of cautious optimism to the self-storage investment market. What remains to be seen is how the uncertain debt markets and a return to more historical performance levels will impact self-storage valuations in the coming year. Click below to read more about the outlook for 2024!