Thanks to a virus our lives and our world have been turned upside down… So here we sit in quarantine, wondering how this pandemic will impact the self storage industry as a whole, and more specifically the self storage properties you own. The impact could be significant… However, most feel self storage will come out of this fairly well as it’s considered one of the few “recession resistant” asset classes. This does not keep owners though from asking “how much are rents going to decline or occupancies dip during this economic downturn?”. The answer is it’s too early to tell. Owners may also wonder “how much will their facility decrease in value, if any, over the next 3 to 6 months?”. The answer again is it’s too early to tell. We don’t know where the debt and equity markets are going to land. Investors behind the lending need to see an end in sight to the colossal financial losses before stabilized lending and transacting resumes.
During this downturn and hopefully a soon-to-happen recovery, many are asking “will self storage continue to be the best performing asset of all real estate asset classes?”. The most likely answer is yes. Since 2000, self storage has been the top performing real estate sector in terms of total return on equity. The advantage self storage facilities have over other asset classes, while the risk of virus transmission is still of great concern, is that tenants can move-in and out and pay rent “contactless” as its now being termed by the industry. Tenants can access their units without any human interaction and can pay rent thru a phone app or thru auto-pay offered by most self storage operators. This is definitely a positive in the new day and age we are living. Plus the economic downturn will be producing demand generators for self storage, whether thru residential or corporate downsizing, relocations, job losses, divorce, death and the list goes on… These new demand generators will certainly help offset any demand disrupters, which during an economic downturn is typically when tenants can no longer afford to pay rent for storage. Ultimately, we are hopeful occupancy levels will stay strong, just as they did during the last recession, without significant adjustment to current market rents. The upcoming months will certainly tell the story.
Even though we do see positives for our industry, we still have to keep an eye on certain markets and/or overbuilt markets to see how they are impacted. Intensely competitive sub-markets may see institutional or larger operators motivated to deeply discount rents to maintain high occupancy rates. Those rent discounts can stress the competition, especially the smaller operators. As we all now know, most of the primary US markets are oversupplied; therefore, unless you’re a REIT, your property may not operate at its peak performance, even in a secondary or tertiary market. If you find yourself unsuccessfully trying to compete in this type of market, with the larger competitors showing no floor to their rental rates, then selling your asset may become necessary. So while lenders are searching for a bottom and an indicator to the end of the financial volatility, you might wonder what your property could sell for in the coming months. There is still an abundance of equity investors need to place into stable, cash flowing assets like self storage. Pricing levels for self storage properties may stay strong as deep pocketed investors look to self storage as a safer play in today’s investment market.
If interested, we can provide a free market valuation adjusted for today’s market challenges. Please give us a call to discuss your property and/or portfolio. You can reach Tom Gustafson at (216) 409-3186, Matt Davis at (440) 570-9003