It seems like there is a lot of wringing of hands and mashing of teeth when we talk about buying self-storage today.
As I have said recently, it really takes something to buy self-storage or create a storage opportunity today.
Usually, it’s a lot of work.
Yet, today, even with all of this being true for me, I am optimistic about the upcoming year.
Why?
Let me tell you.
And in no particular order.
This was what I was thinking about yesterday on the golf course, and as I sat down to write, it just came out.
The 10-Year Treasury Yield Rate
I checked this before I went to play golf.
It was 4.22, slightly below the long-term average of 4.25%, and down from the previous week.
This is what many real estate interest rates are indexed from.
More importantly, I think it says that the bond market (which I understand is more important than the stock market for determining trends), is saying, “we see inflation going down and we think the economy will be doing much better in the near future.”
I’m no economist, and this is not my only index I watch for guessing at which way the economic winds blow, but it is an important one from what I can piece together.
One of my coaching customers watches it religiously.
Still A Lot Of Self Storage Opportunity
From what I can see, there is still a lot of storage opportunity out there for smaller players like us.
Even with all the consolidation going on.
From what I can gather, still, about 62% of storage owners are “Independent” owners who own only 1 or 2 facilities or so.
They account for about 41% of the net rentable square feet of storage in the US.
That means they own primary smaller facilities, many of which can be expanded and brought to institutional-grade self-storage.
An exciting thought.
Boat & RV Storage
I am not trying to convince you this is a business you should be in.
But it is one I am all in on.
I like the unmet demand and the current drivers in this market.
For a smaller player like myself, sometimes the numbers can be big even though development costs are lower than self-storage. But I am very bullish on it.
Boat & RV leases up faster than self-storage, and if properly placed, can be very profitable.
If you are really bored and want to see my Boat & RV ah-ha moment, click here.
Interest Rates
Now I know interest rates are high.
It makes it challenging to get projects done.
Especially development projects where interest is usually indexed to the prime rate currently at 8.5%.
But, it has had a positive effect, in my opinion.
Many people have stepped to the sidelines.
There are currently fewer people chasing deals.
Many couldn’t figure out how to buy storage and/or get into the business. Many just went to some other investment asset class.
Lots of deals in the pipeline are just sitting in the pipeline or are listed, in other words, mostly stuck in the pipeline.
Now, I know if you started leasing up when rates were 4.25% or something, and now rates are 9.25%, and you are not leased up, higher interest rates don’t seem so good.
But, in general, there are fewer buyers competing for deals.
Being able to get them a storage opportunity today is a big deal because when the sideline people come back in, rather than competing with them, perhaps you can sell to them.
Also, I do see rates gently sliding down over the next few years to the 7%’s or even in the 6%’s.
Our deals that are now in the 8%’s and 9%’s, will be doing great.
Sellers More Realistic
I am seeing a lot of listed properties at “market bid” or at higher CAP rates than in previous years.
Now I know whatever CAP rate quoted as a sales price, or the second or third year CAP rate, that number is not accurate for us as buyers. However, this informs me that the idea that anyone, anywhere, can sell their self-storage project in any condition for a 5% or 6% CAP rate is over.
As Public Storage said in its Q1 update, it sees many more opportunities to buy self-storage in the latter half of this year.
The COVID And The Boom Days Effect Appear Over
COVID did a lot for self-storage.
One thing it did is that, on the surface, that appeared good was the loss of normal seasonality.
Most storage tends to lease up more in spring and summer and less in fall and winter.
I recently found myself explaining this to a lender who was not that familiar with self-storage. I had to tell them that the seasonality they were seeing was normal for stabilized properties.
They were using data from the COVID days to judge what was happening now.
Speaking of that, the go-go days of 95% occupancy as a normal are also probably over.
Historically, self-storage has stabilized around 85% to 88%.
I see that and underwrite it that way.
What that means for me is perhaps a return to normalcy for the industry I love so much.
Normalcy is good.
Normalcy is predictable.
Too bad I am not too normal.
But for our industry, that is a good thing.
Conclusion
Although my golf game sucked yesterday (a technical golf term when one shoots above their handicap), I left the course in an uplifted mood because I was feeling good about self-storage again for all the reasons I just mentioned.
Again, I refer to the sentence above about my being “normal.”
