Section 13 • Self-Storage Market Conditions
Investment Considerations General market conditions and market sentiment re- garding self-storage should always be considered from a macroeconomic perspective. The following Key Perfor- mance Indicators are highlighted from the 3Q Investor Survey (published in Messenger in November 2020):
• Market participants report cautious optimism for the sector in the near term and long run. Many pointed out strong self-storage performance during recessions and that the sector outperformed all commercial real estate in the Great Recession. For example, self-storage oc- cupancy and income dropped significantly less in 2008 than other Commercial Real Estate (CRE) asset classes. Moreover, self-storage loan losses were the lowest of all real estate, as recorded by Trepp. Currently, customer activity has returned to normal, although move-out activity has declined slightly during the pandemic. In July 2020, collections and auctions returned to normal business procedures unless limited by regulatory fiat. Most importantly, cash flow continues to flow as customers continue to pay. Most market participants expect this to continue for self-storage.
• In terms of operations, the average publicly traded NOI for self-storage increased an average of 2.7 percent annually from 2000 through 2019. It is interesting to note this suggests 56 percent of the value change was due to cash flow and 44 percent to appreciation (2.7 percent/4.83 percent = 56 percent). These analyses give insight into long-term cash flow modeling.
• The 20-year time series data accounts for two recessions (2001 and the Great Financial Crises of 2008).
• Brokers and investors surveyed indicate that cash flow mod- eling is emphasized over cap rates. For example, start with the cash flow modeling to see the implied impact to the cap rate.
• Cap Rates - Although a valuation disconnect between buyers and sellers could emerge, it’s likely not attributed to cap rates/ return expectations. Fundamentally, we’re not expecting a major shift in cap rates given investor sentiment remains strong towards the sector. Valuation declines would come from concerns around operations, reducing EBITDA. Certainly, more conservative underwriting but the targeted returns for self-storage appear to be stable. By the end of Q4 2020,
While rental rates or supply per capita in one market might mean very little to a specific site in another market, the trends and characteristics of the comparisons are extremely relevant.
• In terms of market activity, brokers report deal activ- ity increasing by month. Market participants report that after a pause due to the pandemic, transaction activity is steadily increasing. Class-C assets remain the most active (generally under $3 million), but portfolio sale activity is increasing as well, including $2 billion in portfolio transactions that closed in Q4 2020. Notable sales include Bloomberg’s report that Brookfield is exploring the sale of 120 assets across 23 states seeking $1.3 billion. Globe Street said that REIT Jernigan Capital announced a definite merger agreement with NexPoint Advisors L.P. to go private in a deal reportedly near $900 million.
• Throughout the pandemic, storage REITs outper- formed YTD (year to date) and TTM (Trailing Twelve Months) compared to the Dow Jones Industrial Average.
• A 20-year time series of self-storage single asset pricing can be compared to public pricing. The aver- age stock price for the sector from 2000 through 2019 increased an average of 6.49 percent. Comparatively, the average single asset increased 4.83 percent during the same time frame.
124 Self-Storage Almanac 2021
however, it appears cap rates have declined another 10 basis points due to strong sector demand.
• Development - Construction impact is varied across the country, with some MSAs at a total halt but others still moving forward; this will slow down new starts and extend comple- tion timelines. Additionally, supply chain constraints due to inability to get materials delivered on time will impact con- struction. As a side note, we’re beginning to hear from some developers that they are seeing opportunity for discounts from commodity suppliers.
Market Analysis Summary It will always be the case that the local sub-market around any given site will provide most of the relevant data points. However, the context provided by comparing a given site or a given mar- ket to the industry overall can reveal underlying strengths and weaknesses that otherwise could be ignored. Especially relevant are the overall trends within datasets as well as comparative sets like smaller markets vs. major markets or population centers vs. more rural markets. While rental rates or supply per capita in one market might mean very little to a specific site in another market, the trends and characteristics of the comparisons are extremely relevant.
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