Market Monitor

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.

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.

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.

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.

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.

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.

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.

Without question, 2020 proved to be a very unique and challenging year and the anxiety related to the coronavirus made most investment reports irrelevant. However, it is clear that each part of the country is experiencing a different amount of disruption due to local infection rates, local and state mandates and the overall outlook on how we should be handling this disruption.  Argus is the only national full-service self-storage advisory group comprised of third-party management, investment sales and advisory services, which gives us a unique, all-encompassing perspective for self-storage owners around the country. Below we have tried to touch on some key points regarding the investment markets and also provide some tips for self-storage owners and operators as we head into 2021.

Ready for some good news? Never have prices been higher for self-storage properties, either in absolute dollars, per square foot, or in relation to the income they produce. Over the last year we have seen self-storage values rise dramatically. For the last several months we have been talking about how the self-storage sector will perform through the pandemic and resulting recession. Remarkably we have seen cap rates compress 10-20 basis points and values on average have risen 1.8%-3.7% in 2020! With all of the hype surrounding the self-storage sector today and a record amount of capital seeking safety and consistent yields, self-storage is once again proving to be a CORE asset due to its long-term performance history in good times and bad. Let’s review three things we have learned in 2020 that will continue to impact the opportunities in self-storage sector.

In today’s dynamic self-storage business environment, many independent owners are forced to compete with larger, better capitalized and more sophisticated self-storage operators.  Most owners consider the REITs to be the largest competitors in their markets, but we are now seeing the regional players and third-party management companies grow to a level that leaves the local independent operator with more skilled competitors than ever before.  So, the question has become how can an independent self-storage operator take on the giant corporations and large third-party management companies and not only survive but make increased profits?  Quite simply, operators need to change their attitudes and become more proactive!  Following are four strategies that you can employ to compete and thrive in your local market.

One of the most common themes in my conversations with clients has always been the market valuation of their property and outside factors affecting the investment market.  New supply, softening rental rates and rapidly rising real estate taxes have been at the forefront of these conversations over the last few years. Today, however, investors have much more on their minds with the election less than 60 days away, a global pandemic unfolding, and capital gains tax and 1031 exchanges under close review.  Now, more than ever, owners need to be reviewing their self-storage investments to make sure they are protecting their valuation.  The slow creep of rising operating expenses has put undue downward pressure on NOI growth; a trend that can be seen industry-wide as the five major REITs have reported NOI declines for more than five consecutive years. A small but meaningful review of your operating expense might be the most important in years as we are finding that it is easier to dig in and cut operating expenses rather than grow revenue under today’s market conditions.