Industry experts weigh in on what's next for this resilient market, in the fifth installment of our 2023 outlook series.
Source: MultiHousing News, January 2023
The self storage sector entered 2022 with no signs of winding down after a record-setting previous year. Investor interest and demand continued to be substantial, and the year kicked off with the Sun Belt region firmly on top in terms of annual rent growth, with some metros even seeing double-digit rent increases for almost all unit types. Overall, street-rate rents persisted in climbing even further in the summer months, but then they began to gradually temper toward the last quarter of the year, according to Yardi Matrix data.
“After two years of record performance during the pandemic, self storage continued to be strong in 2022, with rents up almost 4 percent year-over-year between the third quarter of 2021 and the third quarter of 2022,” the national director of Marcus & Millichap‘s self storage division, Steven Weinstock, explained.
But the end of 2022 came with a notable cooldown, just like in other property sectors. Can the self storage niche hold on to its recession-proof reputation? What lies ahead for the sector after a stellar performance in the past couple of years?
“I like to call COVID-19 the ‘extra credit’ years for the self storage industry, and we’re now transitioning back to more normalized pre-pandemic trends and behaviors,” said Extra Space Storage Executive Vice President & Chief Strategy and Partnership Officer Noah Springer.
He believes 2022 was one of the sector’s strongest revenue performance years in history and attributes the impressive growth to the heightened demand throughout the pandemic that followed a previously unseen, low vacancy. This resulted in “the highest occupancy levels the sector has ever achieved,” as he put it. Now, the industry is gradually trending back to more sustainable levels.
“In the coming years, we’ll start to see revenue growth normalize and return to single-digit year-over-year growth, which is still really good, just not the numbers we were seeing in the unusual operating environments of late 2020, 2021 and the first half of 2022,” Springer clarified.
Meanwhile, Michael Wachsman, director of acquisitions at Andover Properties—a company that has a portfolio of more than 12 million rentable square feet across more than 150 facilities in 18 states—has a different way of looking at the storage industry’s performance this past year. Just as the pandemic became a firm before-and-after event, there was a similar turning point for the sector during 2022 that shattered investors’ rose-colored glasses, according to Wachsman. While he admits 2022 was a strong year for operational performance, he points out that the Fed’s aggressive rate hikes were a game changer.
“In March, the consensus called for a Federal Funds rate of 1.9 percent by year-end 2022. The current target is now 3.75-4.0 percent, with more increases to come,” he mentioned. “As a result, lenders have been selective in the back half of the year, which has negatively impacted transaction volume.”
Today, the bid-ask spread between buyers and sellers continues to widen. On one hand, buyers are pricing in increased uncertainty and more expensive financing, while sellers are still clinging to 6-months-ago pricing, Wachsman noticed.
“Some sellers are now offering seller financing, hoping to bridge the bid-ask gap. The only certainty we foresee in 2023 is continued strong interest from investors trying to increase their exposure to the self storage sector due to its favorable fundamentals, attractive operating model, and strong historical returns,” Wachsman continued.
Read the full article and good news on self storage investing at https://www.multihousingnews.com/are-historical-highs-behind-for-the-self-storage-sector/