Over the past few years, I have been expecting CAP rates to start going up, making self-storage pricing more realistic.
I’m still waiting. How about you?
Have you seen much of a change in storage pricing compared to NOI?
What would change it, and could that happen in the second half of 2019?
Interest Rates
It looks like interest rates are not going to be going up any time soon.
Many people pontificate about the relationship between interest rates and CAP rates. So, in my opinion, don’t look for interest rates to be driving up CAP rates any time soon.
But things are feeling different out there for some reason.
Trade War
As self-storage owners and developers, we have all been directly impacted by the trade wars spurred by the person in the White House. Our prices have gone up 20% to 40% on self-storage systems from the fabricators.
However, most of the “market” (i.e. the stock market) have shrugged off the trade wars until recently. The markets are now reacting to the broader “nationalism” they are seeing in the US and some other countries.
Markets seem to be much more volatile in the second half of this year.
US GDP growth is said to slow down to 2.1% this year from 3% in 2018. It is further predicted to go down to 2% in 2020 and 1.8% in 2021, according to a forecast from the Federal Open Market Committee meeting in Feb 2019. According to them, the slow down is the side effect of the trade wars.
Jobs
On the surface, unemployment looks good. But you don’t have to look very hard to see a slightly different story.
Jobs needing a master’s degree will grow the fastest, while jobs needing a high school diploma will grow the slowest.
One of the things I have started doing is not only looking at the population, population growth, and income per household but at the education level of the population (not always easy to get in marketing packages). Markets with higher educated populations will most likely tend to thrive and grow better than ones with a lower educated population.
This is not in stone yet, but start becoming more aware of it. More educated communities are the ones that will be attracting companies for the rest of the century.
Another misleading aspect of the unemployment rate numbers is the fact some people have been unemployed for so long from higher-paying jobs; they have taken low pay part-time work and show up as gainfully employed.
I think in the future, job growth will be for the highly educated or low paying. There will not be anywhere near as many manufacturing jobs as in the past where a person with a high school diploma could earn a middle-class income. Those days are gone.
Less Secure
From our commercial brokerage business, we are seeing some companies beginning to put expansion plans on hold and see how the rest of this year plays out.
I have not heard conversations like that from 2018 through 2010.
I am not equating our time here to tat time period, but it is interesting that some companies are waiting out to see if the economic cycle is ending.
My Predictions on Economy and Storage CAP Rates
I am not an economist, nor am I really that smart. You really shouldn’t listen to me that closely.
However, I am going to make some predictions anyway from what I am seeing.
The economy is going to begin to feel flat for the rest of this year and the first half of 2020. Without getting too political, the tax cuts have not to lead to many jobs as promised, (but companies have had more cash, so thee have been a lot of stock buybacks).
The economy will feel sluggish, but no recession through 2020.
However, CAP rates will begin to rise slightly for self-storage for sale in the larger, overbuilt tier-one cities, as well as in rural markets. Through 2020, in secondary markets, especially in the southeast and southwest, the CAP rates will still be as low as they are now through 2020.
Lease up time is increasing, and there will be a lot more development “opportunities” as well as partially leased (below Proforma in absorption) deals hit the market.
But, remember, when the economy slows, self-storage is the asset class to be in. In the last recession, storage was one of the few asset classes that held its own with an average of 6% to 8% less occupancy. Just don’t be caught in lease-up a long way from break-even.
Often, the mom and pop smaller facilities hit the market. Their decision to sell has nothing to do with CAP rates or market conditions. There has been a life change in the lives of the owners. Look for those opportunities where there is expansion capability.
