Fundamentals in the national self-storage market have remained healthy compared to most other property sectors, including the retail, office and industrial sectors. Asking rents have remained relatively stable at 93 cents per square foot, down only one cent from the third quarter of 2007.
But as we move into ’09, self-storage fundamentals are expected to soften as the single-family housing market continues to deteriorate. Demand for nearly half of the nation’s self-storage units comes from the single-family home transient moving sector—those people moving from one house to another. Consequently, the tremendous downshift in housing sales and new construction impacted self-storage occupancy levels.
In the third quarter of ’07, occupancy was 90 percent, though it dropped 300 basis points in the third quarter of ’08 to 87 percent. Improvement in nationwide self-storage fundamentals hinges upon the length and breadth of the U.S. recession and global economic crisis.
Supply and Demand
Demand has subsided for self-storage units in light of the economic crisis. The investment community believed self-storage was recession-proof, which held true because of the previous limited supply of units. From 1995 to 2005, the number of storage facilities nearly doubled nationwide; however, an onslaught of development changed self-storage market dynamics.
Additionally, in the current economic environment, leasing self-storage space is considered a discretionary expense versus a necessity. When people lose their jobs and houses are foreclosed, storage isn’t a “must-have” or necessity. Instead, individuals must start reducing expenses and storage will be one of those discretionary items that will be cut.
Nationwide, most self-storage owners are experiencing increases in late pays, liens and lower auction proceeds. The prices people are willing to pay now for the items stored at auction are not as high. As a result, owner revenues are reduced as people make late payments. Owners also have more overlocked units and lien sales because self-storage tenants have decided their stored goods are not worth the monthly payment in many cases.
As a result, tenant concessions and delinquencies have increased in the self-storage market, a trend that is expected to continue this year. Currently, public and private self-storage owners are offering tenant concessions at their facilities. Compared to a year ago, when only 30 percent of national owners offered concessions, concessions have increased to 70 percent at national facilities, according to a white paper recently released by Merrill Lynch.
Publicly traded REITs and large owners are outperforming the self-storage market due to their professional management, economies of scale, extensive advertising campaigns and quality of employees. Whereas the national occupancy rate currently stands at 87 percent, occupancy for larger, public self-storage facilities is around 90 percent.
Buyers and Sellers
Despite the slowdown in overall commercial real estate transaction velocity, there are still buyers in the self-storage investment sales market. Overall transaction velocity in the self-storage market dropped 30 percent in the past 12 months while the broader investment market is down 65 to 70 percent with respect to transaction velocity.
Nonetheless, the most active buyers are private investor clients who can more easily access acquisition financing from local and/or regional banks and life insurance companies, while institutional activity has virtually subsided. Many REITs and institutions are digesting the self-storage product they developed or acquired during the frothy years of 2004 through 2006, and are now focusing on operations. For large portfolio sales, there are very few lenders willing to provide acquisition financing.