As self storage owners, we hear a lot about inflation today. What does it mean for us?
Well, in my opinion, it is a mixed bag.
I should start by saying I am not an expert on much in life, especially not the economy. There is no reason why you should listen to anything I have to say about inflation. All I have to say is strictly from my reading, experience, and opinions, all of which may or may not be very good.
Like Elon Muck says, I am starting from the premises. I am probably wrong.
The Good
However, not knowing a lot has never stopped me from talking about it.
If there is inflation, self storage is a good asset class to be in.
Unlike other investment real estate types, self storage has no long-term leases. So, rents are not locked in and can adjust with the market or inflation. Owners can move quickly to adjust rents.
Also, as I discussed in Episode 330, inflation and a tight housing market are causing apartments rents and housing costs to skyrocket. Both of which are drivers for self storage consumption.
The Marcus and Millichap 2022 Economic Outlook For Self Storage white paper recently released anticipated average self storage rents increasing another 4.5% this year after surging 13.3% in 2021.
Given inflation was 4.7% in 2021, not bad for self storage owners as a whole.
Perhaps there is another asset class that has had a rental increase this big in the last year or so, but I don’t know any of them.
According to the report mentioned above, the average self storage rent in the US is $1.16 per square foot per month or $13.92 per square foot per year.
Many consider the current inflation somewhat temporary and should settle down after resolving supply chain issues, but who knows.
The Bad
Given the benefits self storage offers in inflationary times, even money is chasing self storage, driving prices up and CAP rates down.
I have never had as hard a time finding expansion deals that can work (hence my focus on conversions at the moment).
I personally see no relief for a while on the upward pricing pressure on existing self storage as inflation continues.
So, it is going to stay hard for us smaller investors to compete with all of the larger players and stupid money chasing storage.
It is a good time to sell, and we have taken full advantage of it, but a hard time to buy.
The Ugly
As I said above, I really don’t see much changing in the near future for smaller investors.
I am asked all the time… “but as interest rates go up, which they certainly will, won’t that relieve the downward CAP rate pressure.
I doubt it.
Again, no reason to listen to me, but I don’t care what people say about CAP rates being tied to interest rates. I don’t see it.
I believe CAP rates are tied more to the availability of investment capital, not interest rates on debt.
And I don’t see a shortage of investment capital today or on the horizon, even as interest rates climb.
I see nothing but more high prices as we have any level of inflation above 2.5% per year.
Inflation makes self storage shine brighter than it already is.
Although it is more challenging than it used to be to get into self storage as a small investor, believe me, it is well worth the effort.
The best time was ten years ago, and the next best time is now.
I have no control over inflation, but being in self storage during it is a good place to be when it is around.
