A recent essay in “The Wall Street Journal” by Dr. Nicholas Christakis, director of the Human Nature Lab at Yale Institute for Network Science, asserts that in regard to COVID-19, we are in the immediate pandemic period and will be until 2022, about which time a widely distributed vaccine will be available or we’ll have collectively achieved herd immunity (or some combination thereof). After that, while people are recovering from the clinical, psychological, social and economic shock of the crisis, we’ll be in the intermediate period. In 2024, we’ll enter the post pandemic period when things gradually return to “normal.”
I chose to begin this outlook for the year with that information because it helps us understand where we are in the self-storage industry now, and where we might be headed. Let’s examine the current state of the business and how things might unfold in 2021 and beyond.
At the onset of the pandemic, there was a delay, even a freeze, in normal self-storage operation. Most facilities experienced low activity while shelter-in-place orders were in place. As summer turned to fall, things picked up.
However, before returning to business as usual, the self-storage real estate investment trusts (REITs) posted negative same-store revenue in the second quarter, ranging from -1.1 percent to -3.1 percent. Net operating income for same-store pools ranged from -1.2 percent to -6.8 percent. The temporary pause in rent increases for existing customers in March, April and May, combined with a halt in late fees, led to these declines.
Yet something good happened, too. It was measurable for the REITs because they’re publicly traded; however, I suspect it’s also true for mom-and-pop operators. Occupancy levels rose to all-time highs, or near all-time highs. The REITs ended the quarter at 91.1 percent to 94.5 percent, driven by the suspension of lien sales combined with limitations on move-outs. Then July saw a substantial increase in move-in activity, according to brokerage and investment-banking company MJ Partners Real Estate Services. Moreover, the self-storage operators with whom I speak regularly report that occupancy levels are indeed in the low and mid-90s.
As to new facility development, it took a pause in summer, with a number of developers pulling back from new construction. With some markets bordering on oversupply, plus a deep uncertainty around the pandemic and slower than usual stabilization timelines for some projects, caution prevailed in many cases.
Trends to Expect
Fast forward to early November when this article was written, and we’re turning a corner in self-storage. To use Christakis’ verbiage, you could say we’re exiting the immediate period of the pandemic’s impact on the industry and entering the intermediate. As such, we need to start thinking about how our customers’ lives may be changing and how they might use self-storage in the near future. During this intermediate stage, which I believe will last deep into 2021 and perhaps longer, these are some of the trends we should expect:
Occupancy should remain close to stabilization levels for one basic reason: human nature. People are extremely resistant to giving up their stuff!
The current 8 percent public utilization rate of storage facilities will continue to grow, making it a compelling long-term investment, according to research and advisory firm Green Street Advisors.
Sadly, small-business and personal bankruptcies are happening and will likely increase as we move deeper into the COVID-19 economy. This will drive demand for storage units as people seek a place to keep their equipment and other goods.
Migration and population growth will also fuel demand for self-storage. A study by moving company Atlas Van Lines that tracked U.S. migration patterns in 2019 found more Americans moved to Idaho than any other state, while New York led the nation for outbound movement. The nine states with the greatest inbound movement following Idaho were Washington, North Carolina, New Mexico, Tennessee, Rhode Island, Arizona, Alabama, the District of Columbia and Texas. These states show promise for self-storage growth, though it’s difficult to say how the pandemic might change patterns moving forward.
Self-storage is also attracting fresh investors. In search of yield and relative safety, they’re drawn to the industry’s historically high occupancy and steady cash flows. Take StorageMart, for example. Already one of the sector’s biggest players, with more than 200 facilities in North America and the United Kingdom, the company landed financial backing in the fall from Cascade Investment LLC, a private entity led by Microsoft co-founder Bill Gates, and Singapore sovereign wealth fund GIC Private Ltd. There are lots of investors looking for self-storage deals, and the inventory of for-sale properties is very thin. Good facilities in desirable locations are getting multiple offers and will continue to do so in 2021.
Financing will be available, though requirements may be more demanding. In an article written for Inside Self-Storage in late April, industry finance expert Shawn Hill of The BSC Group wrote, “The funnel of available capital is much narrower than it has been in quite some time. There are still lenders originating loans, but there are fewer of them, and the criteria for qualified deals has intensified. Lenders that remain active are overwhelmed with requests and, in general, have the luxury to cherry-pick deals right now.” In 2021, I expect we’ll continue to see selective lending that depends largely on sponsor credit, property quality, size, location, market competition and related criteria. Borrowing will be challenging but not impossible.
Advice for Owners and Investors
What does the post pandemic period look like for the self-storage industry? That remains unclear, but “This too shall pass.” The U.S. economy did a terrific bounce in the third quarter, growing at a record annualized gross domestic product rate of 33.1 percent, which followed the record second quarter plunge of 31.4 percent. Yet it has a long way to go for full recovery.
That said, self-storage owners and investors should take a lead from the REITs and upgrade their properties. Shop REIT facilities in your markets and experience firsthand some of the changes they’ve implemented. Among them, you’ll see a shift to contactless transactions, which has brought technology to the forefront of the business. If your properties aren’t technologically up to date, an investment may be worthwhile. In addition to improving the tenant experience, new tools allow managers to focus their energies on the aspects of facility operation that need it the most. For some properties, they may even eliminate the need for some personnel.
Lastly, I encourage you to get a property appraisal. If not annually, you should do this at least every other year. Going through this exercise will uncover deferred maintenance and other potential issues that could negatively impact your investment. Knowing your property value helps maintain focus on cash flow and keeps you up to speed on financing trends and competition. Getting a valuation is essential in updating your exit strategy or simply refreshing the way your properties are operated.
Denise Nunez is a senior vice president with Phoenix-based NAI Horizon and one of the firm’s top-producing brokers. An expert in self-storage real estate, Denise has more than 25 years of experience in the industry, including 10 as a real estate broker serving Arizona and numerous U.S. markets through her affiliation with NAI Global, a commercial real estate services firm. For more information, call 602.393.6784; email firstname.lastname@example.org.
The following is reprinted with permission from Inside Self-Storage, which has provided quality information and education to self-storage industry professionals for nearly 30 years.