A Macro Look at Today’s Self-Storage Market and the Factors Affecting Occupancy, Revenue and Facility Value
|Copyright 2014 by Virgo Publishing.|
|By: Ben Vestal|
|Posted on: 05/12/2013|
While self-storage owners are enjoying a surge in occupancy, revenue and, most important, property value, the U.S. economy continues to work through some messy politics while still registering modest growth. In the face of tax increases and the sequester budget cuts, the U.S. gross domestic product (GDP) is still on pace to grow around 2 percent in the first half of 2013, according to Moody’s Analytics U.S. Macro Outlook.
Self-storage continues to benefit from the mobility of the U.S. population, with more than 36 million relocating in 2012. That's an increase of 2.5 percent from the record low of 35.1 million in 2011, according to the U.S. Census Bureau. Most important, consumer spending remains resilient, as demonstrated by increased retail sales in late 2012 and recent trends in big-ticket items such as homes and vehicles.
The same-store revenue reported by self-storage real estate investment trusts (REITs) also indicates a positive trend. It seems the U.S. consumer is comfortable enough continuing to spend money on storage.
Self-Storage Fundamentals: Positive But Still Uneven
The self-storage markets are clearly on the mend. The demand metrics for all major markets have indicated positive occupancy gains for two straight years. More than 80 percent of the country is currently absorbing excesses self-storage space. However, the performance varies greatly by location and market.
The record occupancy levels reported by Public Storage (91.5 percent) and Extra Space Storage (87.8 percent) would indicate that demand is exceeding pre-recession levels, with same-store revenue growth of 4.9 percent and 6.6 percent respectively at the end of 2012. It would be safe to assume that we’re reaching new levels for self-storage demand.
The unevenness in the self-storage recovery links back to the abnormally slow economic recovery. With a GDP growth rate of 2 percent, there’s simply not enough growth to go around. The best properties in each market will continue to outperform the other properties that are competing for the same customer. This is consistent in markets across the board, and I expect the fight for equality to continue through the first half of 2013.
On a positive note, we’re seeing signs that the demand and the consumer’s price elasticity for the self-storage product are beginning to trickle down across the entire sector. We’re also seeing all properties enjoy an uptick in occupancies and revenue.
Credit Is Flowing
Over the last three years, we experienced a very choppy capital market. However, in the first half of 2013, we’re seeing a compelling lending environment emerge, at least for the time being. With the self-storage fundamentals firming up, lenders are once again targeting self-storage assets that can earn higher returns.
Over the last three months, the commercial mortgage-backed securities (CMBS) market, which is responsible for about 25 percent of all commercial real estate loans, has provided nearly $21 billion in new loans. This is nearly double the volume during any other stage of the current recovery. It’s also worth noting that the pricing of these loans is getting increasingly aggressive, but it’s also comforting to see the underwriting is generally conservative compared to pre-recession levels, with loan to values remaining in the 65 percent to 75 percent range.
Traditional banks are also becoming more active as commercial real estate trended upward for the better part of a year and a half. With job growth spreading beyond just the usual markets (New York, Washington, D.C., etc.), combined with the loosening credit markets, it’s safe to assume that investment sales (self-storage properties included) will continue to climb at a steady clip throughout 2013.
Enjoy the Ride
Unlike in previous years, the self-storage investment outlook is easier to spot—and it’s poised for a robust run. We’re enjoying increased occupancy, revenue and facility value. All of this is supercharged by the low interest rates and lenders that are willing to give self-storage the respect we all know it deserves.
Today, the downside risks are familiar ones, with the biggest being inflationary risk. This is followed by energy (gas) prices, the Euro crisis that seems to be creeping back into the headlines as of late, and the biggest wild card of them all, the U.S. fiscal policy. Seeing through all of the messy politics and possible downside risks mentioned above, the U.S. economy will grow between 2 percent and 2.5 percent in 2013, enough to create 1.9 million new jobs and assist the commercial real estate markets, including self-storage, in making significant strides—assuming the economy will have no external shocks or self-inflicted wounds.
Ben Vestal is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self storage buyers and sellers and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE; e-mail firstname.lastname@example.org. To learn more about cost segregation and accelerated depreciation, visit www.argus-selfstorage.com .