The past couple of years have created an unprecedented fiscal landscape, for good and bad. The substantial disruptions of 2020 were quickly curtailed by the federal government’s arsenal of financial tools, which led to a swift recovery throughout 2021. Though many people suffered, the multi-trillion-dollar injection into the economy led to strong consumer spending and robust corporate profits in the face of a once-in-a-generation pandemic.

Self-storage has been a fortunate beneficiary of the trends that emerged over the past 24 months. Though the bull run of 2021 is likely to remain unparalleled in the near future, many investors, operators and advisory groups remain optimistic about the industry.

Historically, there’s been a correlation between interest rates and capitalization (cap) rates. When one rises, so does the other. With the feds having already pushed interest rates to tame ever-increasing inflation—and with clear plans to push them further—one might expect cap rates to also increase. However, many argue that the cap-rate compression we’ve seen in recent years will continue for the foreseeable future, particularly in self-storage.

Why? Well, Wall Street has taken a liking to this industry. It’s become the hot new commercial real estate commodity, and as a result, billions and billions of institutional dollars have begun pouring into the asset class.

The StorageMart acquisition of Manhattan Mini Storage and the Blackstone Real Estate Income Trust Inc. purchase of Simply Self Storage are two high-profile examples of recent 10-figure transactions. These giants have set the trend, and more institutional money is following suit. This has led to an unprecedented amount of capital waiting on the sidelines, eager to be deployed. Because of this, the storage industry has become significantly more competitive, and buyers are essentially being forced to accept lower yields if they want to play ball. This has resulted in cap rates continuing to decrease even in the face of rising interest rates.

Nonetheless, today’s economic environment has led to unique opportunities to add significant value, despite continued cap-rate compression. Notably, high inflation has led self-storage operators to project rent growth that far outpaces historical performance. With all this in mind, here are a few trends the big players are expecting to see throughout the rest of the year.

Rent Growth Will Be Strong

The 2021 annual reports published by the self-storage real estate investment trusts (REITs) give us a glimpse into their sentiment for 2022. In short, they remain bullish on continued rent growth this year. Between CubeSmart, Extra Space Storage Inc., Life Storage Inc. and Public Storage Inc., the average upper-end rent growth forecast sits at 12%. The latter leads the pack with a high-end, same-store revenue-growth projection of 15%.

It’s worth noting that these REITs realized average annual rent growth of 3.3% in the pre-COVID environment (2017 to 2019). The fact that they’re projecting nearly quadruple their normal historical performance highlights the enthusiastic sentiment institutional players are maintaining today. In addition, the ability to move rental rates on a monthly basis gives self-storage operators a unique advantage in an inflationary environment.

Expenses Will Follow

That said, high inflation is a double-edged sword. While the REITs are publishing unprecedented revenue-growth projections, they’re expecting their expenses to behave in the same way. In fact, they’re anticiatping same-store expenses to grow an average of 7% this year. That’s roughly in line with the consumer inflation rates the Federal Reserve has published in recent months.

To put the cost increase in perspective, these same REITs experienced average expense growth of 3.1% pre-COVID, and an average of just 2.4% in the trailing five years. This is where the ability to move rates on a monthly basis provides an advantage over other asset classes, plus it’s a measure of risk mitigation for owners.

Net Effect Will Be Positive

New money entering the self-storage market as well as the massive influx in consumer demand that was largely fueled by COVID-induced lifestyle changes will ultimately lead to a net positive for the industry. The REITs have all projected average, same-store growth in net operating income of around 12.5% for 2022.

While institutional players have come to like self-storage as a place to park their money, these kinds of projections also make it clear that they’re confident in their abilities to make this money work for them. Acquiring facilities at ever-compressed cap rates seems less daunting if one understands the potential growth in the space and has the technical and operational resources as well as the know-how to execute.

Once a sleepy asset class that wasn’t even ranked among the four major real estate “food groups,” self-storage has become a Wall Street darling. With rent projections outpacing the inflationary environment and the ability to quickly move rates with expenses, there’s still tremendous value to be gained in the sector.

Tristan Cottarel is the senior acquisitions analyst for Spartan Investment Group LLC, which operates the FreeUp Self Storage brand. He’s responsible for evaluating the company’s expansion opportunities, from underwriting to market feasibility studies to financial due diligence. He was the lead analyst on more than $250 million in acquisitions in 2021. To reach him, call 866.375.4438 or email [email protected].