It’s that time of year when we reflect on the lessons learned in 2024 and set our sights on the new year. Without question, 2024 proved to be a very challenging year. There was real anxiety related to soft market fundamentals, rising interest rates which made most investment reports irrelevant, and pricing discovery on every deal. In many ways, 2024 was not that much different than 2023. What we do know is that the investment market has continued to evolve and the overall outlook for 2025 is cautiously optimistic. Over the last 3-6 months the Fed has started to cut interest rates and provided insights into potential future interest rate cuts for the coming year. However, the impact of the Federal Reserve’s rate cuts on the self-storage industry will be minimal at best and will not have an immediate impact on cost of capital to self-storage investors or property valuations. But it will have an impact on consumer confidence and market sentiment while also having a trickle-down effect to self-storage customers. We have also started to see improvement in leasing velocity and rental rates seem to be stabilizing according to Yardi, but it is too early to tell if the market has bottomed.
Argus’s 30-year history in the self-storage industry gives us a unique, all-encompassing perspective for self-storage owners around the country, as we have been through a few market cycles. Below we have tried to touch on some key points regarding the investment market and also provide some tips for self-storage owners and operators as we begin 2025.
2025 Market Outlook:
- Industry occupancy has been declining from historically high levels. The self-storage REITS are holding occupancy higher with heavily discounted rental rates, thereby sacrificing the holy grail of self-storage investing: NOI growth. We expect industry occupancy will bounce back 200-400 basis points by the end of 2025, largely due to an uptick in home sales, increased utilization, longer length of stay, and the return of consumer confidence.
- Rental rates continued to fall in 2024. We expect modest growth in rental rates during 2025 with most markets’ rental rates growing in the 2-3% range as demand starts to improve due to improving economic drivers and consumer confidence.
- Self-storage valuations will stabilize in 2025 with cap rates remaining flat or slightly compressing. It is clear cap rates are lower today than they should be considering soft market fundamentals and the current cost of debt and equity. Improving market fundamentals and clarity in the economy and debt markets will stabilize valuations and possibly push valuations higher by the end of 2025.
- Growing operating costs such as insurance, payroll, and real estate taxes will be on the front of operators’ minds as we head into 2025. A reduction in advertising spending, reduced office hours, implementation of technology and a major push to contactless rentals/payments will help with payroll costs. However, elevated real estate taxes and insurance costs seem to be here to stay for the foreseeable future.
- New supply will continue to slow in 2025 as higher interest rates, longer entitlement timelines, lower rental rates, and still-elevated construction costs make it difficult to be a developer these days! We will continue to see planned and proposed projects tabled until the developers and their lenders have more clarity on market fundamentals and debt markets. But be aware that the development pipeline is ready to be loaded as soon as we see market fundamentals improve and interest rates soften. There are still many willing and able developers just waiting for the right opportunity.
- Debt markets for self-storage assets will start to stabilize as we head into the second half of 2025. Short term and variable rates will likely be a bit choppy as the Fed continues to monitor inflation, and the cadence and amount of rate cuts is still unclear. Long term rates in 2025 are likely coming down, but there is still enough uncertainty in the market that we will likely see long term rates stabilize in the mid-5% to mid-6% range. For those of us with some gray hair, this is pretty good!
- Transaction velocity will bounce back in 2025 as equity continues to pour into the space. We will see lots of owners faced with refinancing at higher interest rates (high 5’s to mid 6’s) than the last go-around and they will choose to test the market. 2021 to 2023 new deliveries and early lease up deals will be faced with proforma shortfalls due to low rental rates during lease up and difficult refinancing prospects pushing them to consider selling.
- Secondary market performance will continue to flatten while major market assets will outperform as people continue to head back to the city centers for employment, entertainment, and social life.
We should all be very thankful to be in the self-storage industry. While we have experienced a change in the investment market as interest rates settle in at higher levels and market fundamentals start to rebound, I am confident that the self-storage sector will once again outperform other investments. Remember, a slowdown in new development is a GOOD thing; we have access to better and more useful technology, and the very well-documented performance of self-storage during these challenging times will lead the investment community back to the self-storage industry with the understanding that it is the most durable income- producing real estate and the best real estate to own. The investors who have the gumption to push forward and accept lower than anticipated returns during 2024 and 2025 will be rewarded when the market rebounds. 2025 just may be the start of the next self-storage boom!
Contact:
Ben Vestal
P:303-317-6469
E: bvestal@argus-realestate.com
