So, is the decade-long self-storage party over?
Yes, I am finding it harder to put deals together, and I have seen no relief in interest rates for a while.
The 10-Year Treasury Yield is at 4.47%, still above 4% (click the image below for a link to Fred’s economic data chart).
I just don’t see interest rates adjusting downward any time soon.
The ongoing high-rate environment definitely makes deals harder to do.
So, to get a better feel for the self-storage landscape and the upcoming year, one place I look is at REIT data and try to make sense of it.
Public Storage
According to their Q1-2024 report to shareholders, Public Storage anticipates a tapering down of new storage supply, contrary to some data providers like Yardi. I would tend to agree because I think a lot of the listings offering “Development Opportunity” are the upcoming supply Yardi, and others are currently counting.
Public also believes that self-storage listing prices are becoming more realistic and purchase opportunities could begin to grow in the second half of this year. They have not altered their acquisition numbers for 2024.
Extra Space
Although street rates are down, in-store revenues rose 8% from seasonal lows in January 2024. However, they were only 1% higher at the end of Q1 than one year ago.
Surprisingly, Extra Space say people selling homes and moving accounts for 51% of their new leases. I thought home sales were way down due to the locked in effect low interest mortgages many people are sitting on.
Extra also said their occupancy is averaging 93.2%, about 1% over where they were last year end of Q1.
They are bullish on their ability to increase revenues in 2024.
Cube Smart
They reported new customer rental rates are down 13% at end of Q1 (don’t get me started on their rental rate increase strategy).
It appears to me that their in-store revenues were up, however, about 3%. Why? They reported their NOI down by 1.9% , which was driven by a 5% increase in operating expenses. If 5% increase represents only a 2% or so decline in NOI, they must have 3% or so inco0me increase.
A far cry from a 13% reduction in street rates.
Who makes that difference up?
Their current customers and the rapid rent increase new customers will soon have.
Extra Space ended Q1 with a 90.4% occupancy rate.
Is The Self-Storage Party Over?
There are a lot of mixed messages and way too much data for a guy like me to know definitively.
I think the party may be called over, but that does not mean opportunities for small investors to get in are not there.
From 2014 to 2020 or 2021, almost anyone could get in self-storage…and did.
Today, it really takes something.
However, if we can figure out how, or find a couple of deals that allow us to get in and cash flow with positive returns in the current environment, then when rates do go down, let’s say to 6.5% or 6% (I think the 4% days are over), we will be in great shape.
More generational wealth is created in challenging times rather than boom times.
Both brands I ended up selling off from 2019 through 2021, we begun in the 2008 tru 2013 economic downturn.
You will have to analyze many more deals than before.
You will have to be creative in many situations.
But I am still doing deals. I am seeing others doing deals, and when rates drop, if we are getting a return now, it will be exponentially higher then.
Underwrite carefully.
Don’t use a 5%, or in many cases even 6% CAP rates for future valuations.
Don’t assume every deal is going to lease up fast.
Put in concessions during the lease-up period in most deals.
These are just examples of how we have adjusted our underwriting to match the realities of today.
But even with that, we are still finding deals that work.
We have to look under many more rocks to find them, but they are there.
So, is the party over?
Perhaps.
But there is still some dancing going on.
Good luck, and let me know how you are doing.
