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The self storage industry continues to be one of the highest performing asset classes in all of real estate.
Continuing a trend over the last several years, revenue growth and occupancy rates have remained strong through year-end 2019. So, what does this mean for the future? My theme last year was, “More of the Same.” I think that theme could apply in 2020 also. The fundamentals in the real estate market this cycle are much different than the cycle that occurred over a decade ago, where many prognosticators are anticipating more of a “reset” versus a “recession” in the future if things were to decline. Naturally, this steady historical projection was based on information in February just prior to Covid-19's impact on the global economy. Taking a look at that coursed projection prior to the pandemic offers a promising glimpse at the self storage and just how resiliant the sector can be. When considering the main characteristics of storage (Income, Vacancy, Expenses, Capitalization Rates, and Saturation), I would briefly describe them like this:
Existing customer rent increases have slowed but are still strong for the industry compared to other property types. Several REITS who reported increases of 3% to 6% in 2019, are anticipating 2.5% to 4% in 2020. Still strong but starting to slow down. Where the industry has taken the hardest hit, has been new facilities under lease-up. Asking rates in several markets are significantly lower than projected due to the amount of new construction. This in turn has led to longer lease-up periods.
Though individual markets will differ, occupancy remains robust, with the national average over 90% despite new additions to supply. People are spending more money on household goods, which bodes well for demand within the industry. Even with all the new construction, we do not anticipate significant swings in occupancy in 2020.
Expenses are relatively unchanged, but the shift in marketing is all about Mobile! We have noticed as counties/states become more familiar with storage, they are taking advantage when assessing new construction and reassessing existing facilities. Insurance providers are renewing policies at higher premiums in certain markets due to catastrophes that have occurred or could occur. In addition, on-site management is getting more expensive with Federal/State increasing minimum wage. It is getting harder to keep the good ones.
Like last year, everyone anticipates interest rates to increase, which will lead to stabilization or slight increases in capitalization rates. However, based on our Colliers National Survey, there has been minimal change to the national average over the last several years, even in 2019 when we saw interest rates increase several times. A lot of this has to do with supply and demand.
New supply is estimated again between 800 to 1,000 new facilities for 2020 (depending on who you talk to). Of the facilities planned/proposed, only approximately 30% to 40% will see the finish line and complete construction. This percentage appears to be declining in the last couple years (and will have shrunken more due to the ongoing pandemic). Lenders are also starting to tighten lending parameters. Banks want to work with experienced operators to mitigate potential risk. However, buyer demand will remain high due to limited availability of facilities on the market. When it comes to saturation, every market is different. It is important to analyze the needs of a specific market to determine if demand is warranted, such as climate vs. non climate, Class A versus Class B/C. The days of analyzing total population versus NRSF is coming to an end when you consider the type of facilities being built today.
Although slight changes are inevitable due to the economy, the self storage industry continues to present strong fundamentals. Depending on who you talk to, it is a great time to buy or refinance (with historically low interest rates) or a great time to sell (due to continued low cap rates). The relative strength and stability of the industry as well as the U.S. economy and low interest rates, will continue to make self storage a compelling option for investors, attracting offshore capital to the industry as well as to the country. Should be another solid year in 2020!
Editors Note: This article was written just prior to the onset of Covid-19 and economic factors that it has brought, however messaging in reflection of 2019 remains unchanged.
Thumbnanil: Photo by Daniel Frese from Pexels