XII 2021: 2022 Market Outlook
Without question, 2021 proved to be one of the best years ever for self-storage owners. The industry experienced very strong and improving market fundamentals, historically high transaction volume, immeasurable amount of new equity looking to be placed in the space, and a very fluid and robust debt market.
Argus is the only national full service self-storage advisory firm comprised of third-party management, investment sales, and advisory services, which allows us a unique, all-encompassing perspective as we advise self-storage owners. One thing that I have learned in our 27+ year history of covering the self-storage industry is that as owners you must be looking around the corner and positioning your self-storage assets correctly, because a few decisions along the way will make a big difference in the profitability of your investment. Below I have outlined some market predictions for 2022 that will help you start the new year off on the right foot.
XI-2021: A Note of Thanks
Dear Friends, Colleagues and Clients, What a year 2021 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 27 years.
Over the past 12 months we have certainly seen the performance of the self-storage sector accelerate and values have never been higher. Argus is the only full-service self-storage advisory firm that includes third party management, investment sales, and advisory services, so we have a unique perspective that is all-encompassing when assisting our clients with their self-storage investment goals. For many of our clients, the purchase or sale of a self-storage property is a complex and life-changing event. We are honored that they have chosen an Argus Broker Affiliate to assist them in the process. Because of our common interest in the self-storage industry, I want to share with you some takeaways and testimonials from our clients. We are very thankful for our relationship. Happy Thanksgiving! – Ben Vestal
X-2021: Revisiting Inflation
As we head in to the fourth quarter, all evidence points toward a record self-storage transaction year with likely more than 5x the average number of transactions taking place. But what is motivating all of these transactions – high prices, low capital gains taxes, improving market fundamentals…? These are all market conditions that we have navigated over the last 27 years of doing self-storage investment advisory work and we have never seen comparable transaction volume.
I listened to Federal Reserve Chair Jerome Powell say on Friday that “the tangled supply chains and shortages that have bedeviled the U.S. economy since this summer have gotten worse and will likely keep inflation elevated well into next year.” Additionally, the consumer price index, according to the Fed’s preferred gauge, jumped 4.3% in August from a year earlier, the fastest such increase in three decades. It is really happening; but will we see an extended time of hyperinflation and dare I say rising interest rates over the next few years? For those of you who know me well, I have been predicting rising interest rates for the better part of the last decade and have been wrong. In September, half the Fed’s policymakers supported a rate hike late next year, while half preferred to wait until 2023 or later. With the central bank’s target inflation rate of 2% it is likely that we will see some moves by the central bank by late next year to try and rein in the rapidly growing concern of hyperinflation.
IX-2021: Expert Guidance – More Valuable Today than Ever
The value of professional advice during a self-storage transaction today cannot simply be measured by wins and losses. Over the years I have written articles and analyzed just about every aspect of the self-storage business. However, we rarely explain what a good real estate broker’s duties are and why we get paid to help our clients buy and sell self-storage properties.
Over the last several years the industry has seen, on average, more than a billion dollars of self-storage assets trade hands each year and the overwhelming majority (90% or more) of the transactions were handled by a real estate broker. However, there seems to be a trend in the industry of more owners willing to consider transacting their property “off-market” without the professional advice of an experienced self-storage broker. This year is shaping up to be a record transactional year in the self-storage space with the possibility of more than 5x-10x the average transactional velocity taking place in 2021. Because of the incredible transactional velocity today, it is difficult to keep up with market trends and valuations. With an incredible amount of new equity looking to be placed in the space and valuations rising rapidly, the value of an experienced self-storage broker is more important today than ever.
VIII-2021: Self-Storage Continues to Outperform
As we close out the summer, the self-storage industry continues to exceed expectations with record high occupancy fueled by short-term drivers such as continued work from home requirements, explosive home remolding, record high usership, and the typical summer demand drivers. This has pushed rental rates up across the across the country. In July, Yardi reported that the standard non-climate 10×10 street rates rose by more than 10% compared to July 2020 and street rates for climate-controlled units grew by more than 12%.
The self-storage REITs’ same store operating performance in the second quarter 2021 was remarkably strong with an average revenue increase of more than 13% and same store NOI grew by more than 20%. The increasingly high demand for self-storage and rising rental rates has put the outlook for self-storage in a very positive light. Year to date the self-storage REITs have posted a total return of more than 35%, making it the best performing sector across the entire REIT universe.
VII-2021: Access to Equity – All the Stars are Aligned
Among the many years that I have been securing financing for our clients, the current market environment is unique. The Treasury bond rates have dropped more than 20 basis points in the last month, driving down already record low mortgage rates. Yes, it is a great time to take advantage of low-interest rate financing, but the story of access to aggressive financing at low interest rates and a very fluid debt market for acquisitions and refinancing is not new. However, what is worthy of discussion is all of the other market conditions that that are driving the ability of owners to access cash through refinancing their existing self-storage assets.
VI-2021: Staying Competitive in Today’s Market
In today’s ultra-competitive self-storage market, many independent owners are unsure what to focus on to keep their property competitive and increase its value. With the continued growth of the REITs, regional operators, and third-party management platforms, many independent operators are facing more skilled and well-capitalized competitors than ever before. So, the question has become how can an independent self-storage operator not only stay competitive, but preserve and increase their value as well? It is simple; independent operators need to change their attitudes and processes to become more proactive. Below I have outlined four strategies that you can employ to compete and increase your value over the next 90 days.
V-2021: Let’s Not Get Greedy!
As self-storage investment activity continues at a frenzied pace, many owners are starting to consider whether it is a good time to sell. This month, Ben Vestal shares the latest updates on market conditions and the potential impacts of proposed tax changes to help owners decide if they are real sellers in today’s market.
IV-2021: As Good as It Gets?
With all of the continued hype surrounding self-storage investments today, many owners are wondering if the market has peaked or if there is potential for a continued rise in valuations. This month, Ben Vestal outlines the important questions that owners should ask themselves based on their individual investment horizon and risk tolerance to determine if this market is, indeed, as good as it gets.
III-2021: Inflation: Friend or Foe?
As the U.S. economy continues to recover, many investors are turning their attention to the potential risk of inflation and how it will impact commercial real estate investments. This month, Ben Vestal breaks down the causes and impacts of inflation and whether self-storage is uniquely positioned to withstand inflationary pressures.
II-2021: Taking a Closer Look at Proposed Tax Changes
With a new Presidential administration in office, tax planning is becoming increasingly more relevant and important to investors. When it comes to real estate and self-storage it is important to pay attention to newly proposed policies and plans that will have an impact on your investments. The Biden-Harris plan was published as a component of the platform for the Democratic Party and will require Congress to pass it; it will likely have extensive amendments before it is finalized. However, the plan is clearly taking aim at high earners and has many components that will have a meaningful impact on self-storage owners and investors.
The first few weeks of 2021 have confirmed that investor sentiment towards self-storage is at an all-time high. Today, stabilized assets are commanding record high pricing while newly developed lease-up properties and C of O deals are regaining momentum and pricing power, reinforcing that once again, self-storage will emerge from a market disruption as the shining star of commercial real estate. This is largely being driven by the current debt markets and the investment community’s strong desire for yield and assets with low capital expenditures, such as self-storage.
Over the last few weeks, top executives from around the self-storage industry gathered virtually to discuss industry trends, investor sentiment and the overall market outlook for 2021. The consensus is that the industry is experiencing some new demand drivers due to the change in live/work/school environments, the slow down in new developments, longer tenancy and a stickier tenant base, all leading to all-time high occupancy, further fueling investor appetite for self-storage properties. However, despite the positive changes in market fundamentals, most remain cautiously optimistic about the industry’s long-term outlook heading into 2021.