Market Monitor

Public Storage, a leading provider of self-storage solutions, recently announced its $2.2B acquisition of Simply Self Storage from Blackstone. The deal, which was finalized this month, marked a significant milestone for both companies and has far-reaching implications for the ever-expanding self-storage market.  This deal is a counter punch to the $11B Extra Space acquisition of Life Storage announced earlier this year.  With this strategic purchase of Simply Self Storage, Public Storage continues to solidify its position as a dominant player in the sector, allowing it to tap into new markets and broaden its customer base within the Simply Self Storage portfolio.  This deal is no surprise to self-storage professionals; the self-storage industry remains a strong segment within the real estate investment market and the acquisition of Simply Self Storage may just be the beginning of Public Storage’s continued consolidation of large industry participants.

Change and uncertainty go hand in hand, whether it’s looming inflation or the impact of rising interest rates, the stability of the economy is in question and creating uncertainty. Today, many are adopting a “wait and see” policy when it comes to evaluating the market for self-storage investments. We know that the three biggest risks to your self-storage value and the overall industry are interest rates, cap rates and overbuilding. These risks have been looming in the background for years, but as our economy will inevitably change, so too is the likelihood that these risks will have a meaningful impact on the value of your investment.

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.

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.

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 is whether they are REAL and ABLE to execute.   

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.

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.

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.

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.

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.

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.

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.