Market Monitor

It is easy to spot the signs that summer is coming to an end. School supplies are on sale and kids everywhere are trading beach towels, skateboards and baseball gloves for backpacks. It also appears that that the current run-up in self-storage values is coming to an end. Over the last 120 days we have seen interest rates uptick 25-50 basis points and there seems to be a bifurcation in pricing between “core” assets and everything else.   While I would agree that many elements of the economy appear to be stable and growing, the confidence of entrepreneurial self-storage investors seems to be wavering with new supply hitting the market, overall lower occupancies and slower rental rate growth. As a result, many entrepreneurial investors are being more conservative when underwriting self-storage investments today.  On the other hand, “core” assets are still demanding historically high values due to the lack of supply of core assets in the self-storage space.  If you are like me, much of the current market signs don’t seem to fit into a neat package and this makes the remainder of 2018 difficult to predict.

In 2018 the business of buying and selling self-storage properties around the country has become much more complex than in years past, but the discussion with both buyers and sellers always ends up focusing on market cap rates. Unfortunately, most people don’t fully understand all the ramifications of this seemingly simple calculation.   Hopefully this summary will help clarify this mysterious, yet fundamental, concept.

In this high-stakes game of real estate investment musical chairs, NOW is the time to find a chair before the music stops, bringing to an end high real estate prices and easy financing. Recently there have been subtle changes in the lending market that may actually be much more material than an initial glance might reveal. This is the time for serious analysis of your personal objectives and options because the real estate and credit markets are likely to change due to new supply, flattening of rental rate growth and overall pull back in aggressive underwriting.

When most self storage owners wake up in the morning, they don’t usually think about the Federal Reserve Open Market Committee (FOMC). Most owners are busy managing occupancy, controlling costs, and overseeing the operations of their self storage business. On a daily basis, these tasks are far more important than decisions made by Federal Reserve Chairman Jay Powell, and the rest of the FOMC. At the same time, the Fed Funds rate that is established by the FOMC has an enormous impact on the value of self storage facilities.

As investors are enjoying the fluid nature of today’s transaction market, it has become evident that buyers and sellers may need to focus on more than just purchase price. We are in an incredible period for the self-storage industry where the unconventional and unexpected have become a part of everyday business. The influx and sheer amount of buyers/equity in the self-storage space over the last few years has led to higher transaction velocity, higher values and, much to my surprise, has extended the self-storage investment cycle with very little signs of slowing down.

The value of professional advice during a self-storage transaction cannot simply be measured by wins and losses.  In fact, often times the most valuable advice does not even lead to a transaction.  Over the years I have written articles and analyzed just about every aspect of the self-storage business. However, we rarely explain what good real estate broker duties are and why we get paid to help our clients buy and sell self-storage properties.

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.

Many experts agree that the self-storage market has reached the high-water mark, but for the first time in my 20+ year real estate career, the industry is seeing both operational head winds and investment expansion.  Over the last three weeks I have attended several market updates and self-storage investment meetings.  While it is unclear how the self-storage sector will perform in 2018, the majority of the large operators and self-storage REITS are predicting slow to moderate revenue growth in the 3-5% range.  However, the biggest self-storage REIT, Public Storage, is not so bullish on 2018 performance.

Looking back over the last three years, without qualification, the market has simply been the best it has ever been at any time in the existence of the self-storage business.  Interest rates have remained low, lenders are aggressive, industry information is getting better, values have risen rapidly, NOI’s have been growing and large institutional investors are buying self-storage assets.  All of the positive energy and results have supercharged the development cycle and the industry is now entering uncharted territory.

Experience has shown us that the value of self-storage has more to do with where we are in the real estate cycle and with market sentiment rather than the actual performance of the property. Most independent self-storage owners appear to still be selling primarily because of life events, with few making the decision to sell in order to capitalize on the current real estate market. However, it is also very apparent that the institutional investors are taking notice of the current market conditions and are choosing to sell some or all of their self-storage holdings and are being disciplined with regards to new acquisitions.  Concerns about new supply and rising real estate taxes seem to be on the forefront of all self-storage owners’ minds.

Over the last 10 years, the self-storage industry evolved from a mom and pop investment class to a mainstream institutional asset class. The industry weathered the great recession and is now reaping the benefits of strong market fundamentals. Heading into 2018, I want to highlight some industry trends that will continue throughout the year and help the industry’s continued growth.

As we near the end of 2017, there are several signs that should capture your attention and point you in appropriate directions so you can capitalize on current market and economic conditions. From a big picture perspective, the first sign that should catch your eye is that cap rates may have reached their low point and could be ever-so-slightly on the rise.  Meanwhile on the capital markets front, loan options have never been better (with the exception of construction financing). Digging deeper, here are some other signs you can look for as we wind up the year.

Over the last 12-36 months, the self-storage development train has been picking up steam and it is clear that certain markets are starting to feel the effects of new supply.  Because this information is so critical to the ongoing success of the self-storage industry, Argus has worked in conjunction with other information sources and industry professionals to compile the most accurate development information in the industry.  I want to give special thanks to Chris Sonne for his collaboration with Argus on this project and our efforts to provide the industry with the best possible development data available.