I was reading an “Investor Survey” in the last half of 2018 provided by one of the large Commercial Real Estate companies.
Not that these are exact numbers, but they do tend to point to a direction the industry is going. I have seen these surveys from three different companies come up with three different numbers for the same thing numerous times over my career. So I look more for trends, which way things are moving from them rather than exact numbers.
But I did find many of these items interesting. Let me share a few with you.
Forecasted Rental Rate Growth:
The report said it should overall remain flat with average rental rate growth of only 3.5%.
Now I don’t know what you do, but we put in 3% per year in our models. The report went on to say that compared to other real estate sectors, self-storage is rental rates are “robust”, but compared to prior years in self-storage, they are down.
Trade Area Size:
Here is a stat I haven’t paid too much attention to because I always said it varies so much depending on the market you are in. But perhaps I’ll start looking closer at this.
The report indicated that average trade area size is 3.18 miles for a typical suburban type of self-storage. Urban is smaller and rural is larger, with no millage given. It also said aver demand is up slightly .10%. (I’ll take what I can get here).
Average Absorption Rates:
The report went on to say that the average time for a new project to hit stabilization (no size was given) was 30 months, up one month from the last report. 40% of respondents said the markets are at equilibrium; 20% said undersupplied’ and 32% said oversupplied.
I guess it just depends on where those “respondents” were.
Optimism Index:
7.1% (on a scale of 1-10). That was the second lowest since 2010. However, they did get a lot of comments about self-storage being a “safe haven” during economic recessions.
Just know the highest it has been since 2010 is 8.1% in 2015 and the lowest it has been is 6.9% in 2017.
I don’t know about you, but in 2015 through 2017, if you only had about an 80% confidence level in this sector of the market, what are you doing investing in real estate or self-storage? Try CDs. There are fairly safe.
CAP Rates:
The “market sentiment” is that CAP rates will go up .25% over the next year due to increased interest rates (remember, the higher the CAP rate, the lower the value, for more information on CAP rates click here).
I think Class B & C will most likely go up more. In larger markets with Class A storage, the .25 is probably correct.
Conclusion
I share this with you to hopefully give you some perspective.
Yes, market conditions have changed some. But if you stick to the fundamentals, you are going to be just fine.
It could take longer to lease up. Interest rates may go up some. But there will be a market adjustment for these movements.
With new revenue models, we can still keep our average rental rate increasing 3% per year or more.
NOI’s may go down slightly over the next few years due to increased property taxes and marketing cost, but we are attempting to counter that with reduced personnel cost utilizing technology during nonpeak times during the month at the facilities.
You will read a lot of doom and gloom in the papers and periodicals about the market. I think this says more about human nature than it does about self-storage.
Just keep the course, watch the numbers closely, and unless you are flipping in and out of storage, you will do just fine. Remember, wealth is created from the compounding effect of income growth rates being higher than expenses growth rates over the years.
