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. For the last several months we have been talking about how the self storage sector will perform through the pandemic and resulting recession. 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. Here are a few things we’ve learned in 2020 that will continue to impact the opportunities in the self storage sector.
First, it is clear that the low interest rate environment has extended the self storage valuation run along with all commercial real estate. The spread between the 10-year treasury and self storage cap rates is currently around 453 basis points (compared to the 20-year average of 395 basis points), indicating that we have some runway left in value appreciation. The fluid nature of the self storage lending market today has also injected confidence into the sector as we are seeing all debt providers (banks, CMBS, life, credit unions, etc.) willing to quote self storage loans and in many cases, compete for self storage loans, resulting in very competitive terms.
Additionally, the market segmentation between Class A, B and C properties is more defined than ever and we have learned in 2020 that the Class of each property has less to do with the resiliency of the income than once thought. This year we have seen the most resiliency in Class B and C assets and we expect this trend to continue.
Finally, an owner, developer or a broker’s ability to properly evaluate future market demand is the single most important factor in making the right decision now and in the coming year! Many industry experts have pointed out that overbuilding has caused softening in the rental rates and lower rental rates have also led to very high occupancies among the self storage REITs. The self storage REITs are up about 4.85% as of the end of October and reports that new construction is contracting have led many investors to feel optimistic about 2021. However, the one thing we have all learned over the last few years is that the Achilles’ heel of self storage is oversupply and as we see a record number of new investors entering the market in search of safety and consistent yields, it is important to be mindful and understand that we will not always be at 90% occupancies. As the industry has matured, industry data and information has become a lot better but the ability to properly evaluate the submarket is still what has distinguished the winners from the losers.
We are all very thankful to be in the self-storage sector today and these are absolutely the best of times for both CAREFUL buyers and sellers.
