Without question, 2020 proved to be a unique and challenging year. It’s clear that different parts of the nation are experiencing varying levels of disruption due to COVID-19 infection rates, local and state mandates, and other factors. To shed light on how the U.S. self-storage markets were impacted and gain an understanding of how things might shape up for the industry this year, I reached out to several real estate advisers:
- Tom Flannigan, KW Commercial, North Central
- Jeff Gorden, The Gorden Group, Southwest
- Josh Koerner, Weaver Realty Group Inc., Southeast
- Stuart LaGroue, Omega Properties Inc., Gulf Coast
- Chad Snyder and Tyler Trahant, Dominus Commercial, Texas
Following are some key considerations and insight for self-storage investors and owners as we head into 2021.
1. In general, how will self-storage perform in your area this year?
Flannigan (North Central): While the pandemic continues to be the predominant factor affecting the economy and the broader real estate investment market, the more relevant one affecting self-storage will continue to be new supply. Its impact is submarket-driven, and 2020 has proven that some markets are able to absorb new supply better than others. Overall, I believe occupancy will remain steady across the industry. However, I expect most major markets to experience downward pressure on rental rates, as operators are forced to compete with new facilities.
Koerner (Southeast): From what we are seeing in Florida and with the state’s continued growth, it appears 2021 will continue to be very good for self-storage owners. Occupancies remain high; rates are stable or rising; and new development continues to rise throughout the state.
Snyder and Trahant (Texas): Barring anything catastrophic that we’ve not seen before, we anticipate self-storage to continue to perform as well as it did in 2020. We do feel a more traditional monthly inflow and outflow of tenants will begin to occur as potential vaccines for COVID-19 are readily available and communities are again functioning normally.
2. With fewer self-storage listings on the market, will we see more sellers in 2021? How would you advise owners who are considering a sale?
Flannigan (North Central): Most owners choose to sell their facilities based on a life event or change in investment preference; therefore, the decision to sell isn’t always market-driven. I expect to see more sellers in 2021, as there will be a significant increase in life events experienced by self-storage owners as a result of the turbulence of 2020.
Koerner (Southeast): I’m surprised we haven’t seen more sellers in the current market, considering valuations are at all-time highs. It is hard to predict how sellers will respond to the current financial and political environment. However, I’m advising my clients that now is the time if they’re thinking about selling in the near future (one to two years) because interest rates and cap rates are at an all-time low. If the market changes and rates start rising, there’ll be a devaluation of their properties.
LaGroue (Gulf Coast): I believe we’ll see more sellers in 2021. Some of it will be due to the uncertainty of a new administration in the White House and the Democrats controlling both houses of Congress. If that happens, there’ll be some concern about what’ll happen to capital-gains taxes moving forward. If a storage owner were considering selling, I would encourage him to proceed. The market is still very active with many investors looking for opportunities.
Snyder and Trahant (Texas): With supply and demand not in equilibrium for available self-storage to purchase, we’ve seen pricing for continue to increase. The investment market has taken notice of the solid performance of self-storage investments during 2020, and as a result, there are new buyers in the sector and a lot of equity looking to be deployed. For any owners who have contemplated selling or have reasons to sell, now is a great time to take the property to market. The current facility valuations should be a tipping point to move “on the fence” owners to become sellers.
3. Please give us some insight to your market’s self-storage development pipeline and whether it’ll see more or fewer new projects in 2021.
Flannigan (North Central): Given the sharp decrease in rent rates in Minneapolis in 2020, there’s overwhelming evidence that the self-storage market is overbuilt. Some submarkets experienced year-over-year decreases in excess of 20 percent. Given this dramatic shift, I expect the pipeline of new development to pause, as the economics simply do not equate at today’s rent rates.
Gorden (Southwest): In Arizona and Nevada, the pace of new projects slowed significantly in early 2020. However, we’re expecting another wave of properties to enter the planning pipeline between now and next summer.
Koerner (Southeast): Over the last three to five years, I’ve not seen a more active and competitive developer market than what we’re seeing today in Florida. Entitled sites are very attractive, and there’s a large amount of capital being placed in ground-up projects.
LaGroue (Gulf Coast): I’ve seen quite a bit of new development in my markets. Frankly, some of it’s needed and warranted; however, there are some areas that are becoming overbuilt. I think you may see less in the first half of 2021, and that’ll be due to some developers waiting to see how the political landscape shakes out.
Snyder and Trahant (Texas): We feel new development in 2021 will be delayed some. Comparatively speaking, new facilities were down more than 16 percent in 2020 over prior years in the North Texas area. Though some broke ground, the pause button was pushed on other planned projects. In certain markets, this was a welcome sign, as newly constructed properties were having to implement aggressive discounts to achieve lease-up. This respite can allow newer properties to gain more occupancy, strengthening the overall market.
4. What opportunities should self-storage owners be on the lookout for this year?
Gorden (Southwest): For most owners, my advice would be to look in the secondary and tertiary markets in regions of the country with net positive migration. Larger buyers should look for discounts on new developments in core markets, though they’re being heavily shopped. [Also keep an eye on] expansion opportunities on existing properties and ancillary-revenue opportunities.
LaGroue (Gulf Coast): I believe owners will be looking to add on to existing facilities if they have room to do so, or possibly find some land close by that can be built on and operated as a satellite location. I also think folks will continue to target secondary and tertiary markets for opportunities to expand. Lastly, I think buyers will be more aggressive due to low interest rates and lower cap rates across all markets.
Snyder and Trahant (Texas): For investors, the best self-storage opportunities in 2021 may be related to lease-up properties that aren’t meeting their pro forma and either fall short of loan covenants or are cash-strapped and looking to exit the investment prematurely. Well-capitalized investors may be able to step in to purchase assets at attractive prices. For operators, we have seen through the pandemic an increase in contactless rentals. Owners will evaluate other methods of “managing” the store using technology, which could allow for a reallocation of expenses, perhaps to marketing or a reduction in management expense.
Good Times Ahead
We should all be thankful to the self-storage industry, which showed very solid performance throughout 2020, even in the midst of the pandemic. While we’re experiencing a once-in-a-lifetime social and economic disruption, I’m hopeful a COVID vaccine will be widely available and distributed this year, which’ll lead to even stronger operating performance. We’ll likely see even stronger valuations, due to an increase in investor confidence and a slowdown in new development.
The American people continue to amaze me. During the last year, I’ve seen more compassion, generosity, kindness and smiles to each other by complete strangers. It reassures me that we’re all in this together, and I’ve no doubt we’ll get through this and come out even stronger. As we witnessed after 9/11, the Great Recession of 2008, and every time the United States is presented with adversity, we’ll pull together, and the self-storage industry will lead the way.
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 buyers and sellers via an extensive marketing platform for self-storage properties. Property listings and informational resources can be found at www.argus-selfstorage.com. For more information, call 800.55.STORE; email [email protected].