Self-Storage On Track For Strong 2022, But Headwinds Remain

Self-storage is still enjoying a strong year despite increasing headwinds overall including normalizing social behaviors and demand drivers.

According to a new analysis from Marcus & Millichap, the average asking rent for a standard 10-by-10 unit in June was up 15% compared to year-end 2019, while vacancy contracted over the same period by 190 basis points to 6.6%.

Marcus & Millichap’s 2022 forecast sees self-storage vacancy rise on an annual basis for the first time since the onset of the pandemic to hit 7.25%, an increase of 60 basis points year over year. However, lifestyle changes wrought by the pandemic are still expected to keep unit availability “well below” pre-2020 levels, they say.

Construction is at a five-year low, thanks in large part to continuing headwinds impacting construction more generally. About 53 million square feet are expected to be completed this year, well above prior downturns when totals were beneath the 10 million sf level.

Rents also predicted to tick up in 2022 for the third straight year, led by Texas and cities in the Southeast that have seen the most in-migration during the pandemic.  The mean asking rent is expected to close out the year at $1.34 per square foot.

And that’s attracting investors, who registered trades in the 12-month period ending in June 2022 that surpassed pre-pandemic numbers by more than 70%.

“While transaction activity peaked at record levels in the second half of 2021, sales velocity through the first half of this year is still well above historical averages,” the report notes. “Even as interest rates began to climb in March, increasing capital costs, transactions actually rose between the first and second quarters. While this indicates substantial investor enthusiasm, the Federal Reserve is expected to hike rates multiple times before the end of 2022, possibly dampening for deal flow.”

The buying pool is also broader, as investors are looking to self-storage as an attractive inflation hedge and wooed by the sector’s “countercyclical” renter demand: “Most self-storage units are leased on a monthly basis, allowing rents to be adjusted more frequently than in other property types. While the inconsistent rate environment is prompting some larger parties to delay acquisitions, robust fundamentals have kept private buyers energized.”

However, there are some headwinds: “significant” cap rate compression would impact investment, and segment yields nationally declined from the mid-6 zone in late 2019 to mid-5 percent as of April.

Significant cap rate compression could impact investment landscape. Segment yields have dropped notably on the national level since the onset of the pandemic, declining from the mid-6 zone in late 2019 to the mid-5 percent tranche as of April 2022. Marcus & Millichap experts say that buyers looking for higher yields to offset steeper borrowing costs might look for opportunities in outlying suburbs or tertiary markets.

“Capital costs are climbing, impacting terms. Banks, ranging from local to national in scope, continue to be the most active lenders in the space, but are likely to favor borrowers with whom they have an established relationship with,” the report notes. “The owner-user structure common in many privately owned self-storage properties may also align more with bank and credit union preferences in the event of an economic slowdown. Lenders have generally tightened underwriting criteria, with individual asset quality and location continuing to be differentiating factors.”

More funds than ever are investing in the space.  In May, for example, self-storage owner and manager Storage Post announced a $500 million in capital from a fund sponsored by Almanac Realty Investors, a business unit of Neuberger Berman.  Earlier this spring, Cory Sylvester, Principal at DXD Capital, told GlobeSt.com that institutional capital is entering the space “as it has shown to be an extremely recession resilient asset class, along with seeing unprecedented growth since the onset of the pandemic.”

Because the equity checks on a deal-by-deal basis tend to be much smaller than traditional real estate asset classes, these institutional players are looking for partners who can execute at scale, Sylvester said.

“We are seeing that trend in our business, and it has become evident with the recent string of announcements that institutional capital is aggressively seeking a partner in the space.”