As readers of the Market Monitor have come to know, I think that low interest rates have been the best friend of self-storage owners over the last decade. It now appears that the long downward trend in interest rates has turned and rates are now heading upward. In the late spring and early summer rates for real estate loans, including self-storage, were literally at 50-year lows. Many real estate investors have gone through very long careers and never experienced these historically low interest rates and high valuations. While predicting the future of interest rates is not a high percentage game, I think it is safe to say that in the short to intermediate term it would be reasonable for interest rates to continue to trend up, pushing self-storage values down. Yes, there is a new sheriff in town! It is rising interest rates and inflation. Like many of you, I have been watching the stock market and treasuries closely over the last few weeks and the uncertainty that surrounds the economy and how we are going to curb rapidly rising inflation has never been more pronounced.
After five-plus years of momentum building in the self-storage investment market, buyers, sellers and lenders are proceeding cautiously as the volatility in the overall financial markets has yet to trickle down to our small corner of the real estate industry. In light of the recent market uncertainty, we have asked some of our most active and successful Argus Broker Affiliates to opine on the state of the investment market in their respective markets. Below you will find real time insight on how the self-storage market is performing in each area of the country.
Over the last several weeks, top executives and self-storage owners from around the country have gathered in Orlando at the SSA spring meeting and, just last week, in Las Vegas at the ISS spring tradeshow to discuss industry trends, investor sentiment and overall market conditions. The consensus is that the industry continues to be cautiously optimistic about performance in 2022 and rising interest rates are on the front of everyone’s mind. We saw the ten-year treasury continue to rise last week and peak at over 2.9% with market volatility continuing to gain momentum. Meanwhile, self-storage operating fundamentals seem to be strong and an abundant amount of capital continues to flow into the space.
Over the last 10+ years we have been enjoying a very fluid and robust lending market, fueled by historically low interest rates and high valuations. The latest economic reports are startling as the annual inflation rate in the US accelerated to 7.9% in February of 2022, the highest since January of 1982. Everyone has felt the increase in the everyday costs of housing, gas, and food, just to name a few. Inflation is the scrouge of all savers, diminishing the value of nest eggs and retirement accounts. Among other things, inflation is the result of a “cheap money” policy and the economic stimulus that was implemented during the pandemic. Whatever the cause of inflation, the results can be devastating for most Americans, as it is difficult to find a way to protect oneself against inflation.
Today the self-storage market is white-hot! With billions of dollars of equity looking to be deployed in the self-storage space we are finding that many self-storge owners are receiving unsolicited offers from buyers that are aggressively looking to acquire self-storage assets “off market.” It is not uncommon for a self-storage owner to receive 3-10 phone calls a week from buyers looking to acquire their property and many times these buyers are providing the owner an off market “unsolicited offer,” with little to no property-level information. At first glance, these unsolicited offers seem too good to be true; high valuation, relatively quick closing and no broker commission. The fact is they are too good to be true! The reason that buyers are approaching sellers directly is they want to tie up the self-storage property before fully analyzing the asset or submarket and will ultimately try and buy the self-storage asset at a below market price in an uncompetitive environment. This process is putting many owners in a very bad situation and ultimately costing them millions of dollars.
As we kick off 2022, its hard to imagine how the self-storage market can get any better. Economists continue to prognosticate that the self-storage market is sound and actually getting better; brokerage firms continue making rosy forecasts for the industry and your uncle, as predicted, has made his doomsday predictions at the holiday dinner table. The first few weeks of 2022 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 continuing to gain momentum and pricing power. This is largely due to strong and improving market fundamentals and the investment community’s desire for yield with low capital expenditure assets such as self-storage.
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.
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
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.
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.
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.