Even though 2020 was a good year overall for the self storage industry, we believe everyone was happy to turn their calendars to the new year. So, what lies ahead for self storage in 2021? Will we continue to see resiliency in our industry, especially as the ongoing COVID-19 pandemic has many investors facing difficult economic and financial times ahead? Some real estate asset classes have been hit extremely hard by the shutdowns (office, hospitality, entertainment, restaurants, etc.), forcing investors from those industries to pivot on real estate plans going forward. Understandably, self storage has been one of the targeted asset classes to move into considering how well it has performed through both challenging and prosperous economic times.
Overall, we expect the self storage to have another great year in 2021 as investment and development continues throughout the country, driven by significant capital and equity looking to be placed into self storage.
Below we touch on a few pertinent topics and what we expect to see in 2021.
Financing Options – Lenders are expected to remain bullish on self storage and will continue to offer very attractive deals at historically low interest rates. Both permanent and bridge loan debt is available with 3 to 5 years of interest only on permanent loans (10 to 20-year loan term). Whether you are refinancing, selling a single asset or selling a portfolio, today’s financing options will benefit both buyers and sellers and continue to drive up market values, accordingly.
Interest Rates & Terms– Interest rates dropped in early 2019 to all time lows spurring the continuation of investor and developer activity. These rates remain at historic lows with lenders currently quoting rates in the 2.75% to 4.00% range for stabilized deals and 3.00% to 5.25% for C of O and/or new development deals. Understandably, the lower the leverage, the better the rate (50% to 60% LTV is considered lower leverage, while 60% to 70% is considered higher leverage). 10-year loans are amortized over a 30-year period. 20-year loans would use a 20-year amortization period. At this time, we do not anticipate much if any upward movement on interest rates in the near future or throughout 2021. If rates change, they may drift upward slightly, say 25 to 50 basis points.
Supply & Development – Self storage’s new supply pipeline remains steady and should continue to do so in 2021. Nationwide, self storage properties under construction or in the planning stages accounted for 8.3% of existing inventory (as of November 2020). During this ongoing pandemic, developers continue to look at secondary and/or tertiary markets to develop new properties, seeking opportunities in the Midwest or other markets where saturation levels remain low compared to many overdeveloped primary markets. Self storage developers are cognizant of potential population movement from major cities with high density living, a mindset created during the pandemic. Conversion properties, whether they are vacant big box retail stores, industrial facilities or even office and hotels, are highly sought after, especially in growing or undersaturated markets.
Market Demand – Demand for self storage should remain extremely strong throughout 2021. Significant demand, whether it be on the acquisition or development side, continues to be driven by the strength and resiliency of this industry, the large amount of equity looking to be placed into self storage and the low interest rate climate today which allows investors to borrow money at historically low rates. A significant and growing buyer pool is out there seeking any and all opportunities to acquire self storage properties, thus driving up pricing to the highest levels we have seen in years. 2021 will continue to be a seller’s market, especially for those willing to market stabilized assets or more importantly a stabilized portfolio.
Rental Rates – Confidence in the industry remains high as street rates have increased or shown improvement in many markets when compared to the first nine months of 2020. Annual street rates have dipped in some oversupplied markets, but that was expected as several new facilities are in lease up, creating rate pressure. Overall, increasing rate trends and the general resiliency of this industry bodes well for self storage investors and operators into the foreseeable future.
Cap Rates – Cap rates remain at historic lows and have continued to compress on acquisitions of stabilized assets and/or portfolios in key or strategic markets. This trend is a product of the continued low interest rate environment, increased demand to acquire properties or grow existing portfolios, and the growing buyer pool which has created more competition for available self storage assets.
Wishing you all a prosperous 2021 !!!