The resiliency of U.S. self storage and return to new normal
May 19, 2023 10 Minute Read Time
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Self storage and the return to new normalU.S. self storage has been among the top-performing sectors in recent years, benefiting from pandemic-induced tailwinds, including increased household mobility, the rise of makeshift offices and classrooms during the height of the pandemic, elevated home sales and broad-based disruption to daily life. Although the remote work demand driver may have peaked, there continues to be strong growth prospects in underserved markets. Also, the need for more storage units will continue to rise as baby boomers downsize their living arrangements.
According to the 2023 Investor Intentions Survey conducted by CBRE Research, respondents named self storage as their preferred logistics-adjacent sector alongside data centers. Notwithstanding, recent fundamentals have softened due to seasonal patterns, lower mobility, growing property taxes, Fed rate hikes and depressed home sales. Despite economic uncertainty, consumer demand for storage will remain strong as household dynamics shift—particularly in a post-pandemic environment where mobility increases and inevitable disruption ensues. This lends to a resilient real estate investment play.
The U.S. self-storage market is comprised of just over 1 billion sq. ft., 125 million sq. ft. built in the past five years, according to Yardi Matrix. Ongoing labor shortages, supply chain issues and elevated construction costs along with a challenging permitting process have largely prevented overdevelopment in the sector. Still, new supply is expected to increase through 2028 as these hurdles begin to dissipate. Yardi Matrix is forecasting 31.7 million sq. ft. of deliveries in 2023. The share of projects under construction was equivalent to 3.7% of existing stock in March, up 10 basis points (bps) from the previous month. Markets with the highest construction penetration include Orlando, New York, Sacramento, Philadelphia and Las Vegas.
Figure 1: Completions forecast to peak in 2023U.S. self-storage inventory & completions (sq. ft., millions)
Note: Represents sum of the inventory in the 47 markets covered by CBRE.
Sources: Yardi Matrix, CoStar and CBRE Investment Management., as of May 1, 2023.
Operating fundamentals have been at, or near, all-time highs the last three years. Occupancy levels are in the 94%-96% range, giving landlords pricing power and driving robust revenue growth nationwide. Average rents have risen by an average of 5.8% over the past five years, spiking 17.4% in 2021, according to Yardi Matrix reporting of self-storage REITs. Consequently, the sector has proven to be a strong inflation hedge, with annual rent growth largely outpacing CPI over the past five years.
U.S. self-storage transaction volume grew from $6.2 billion in 2020 to $16.8 billion in 2021, an increase of 170%, far outpacing the historical average annual transaction volume of $4.4 billion from 2010-2021, according to Real Capital Analytics and CBRE Investment Management. Relative to other property types, self-storage capital markets have recently been less active with fewer relevant comps for pricing readthroughs. Many large deals transacted in 2021 when operations were at all-time highs and the bidding pool was deep. Sales volume, however, dropped 44% in 2022, to $13.3 billion.
Self-storage expected returns are relatively attractive in the public market. While lower relative cap rates limit risk-adjusted returns, a low historical capital-expenditure profile and relative stability of cash flows support current pricing. Given interest rate hikes and the reduction of leverage levels from lenders, cap rates expanded in 2022, ticking up about 80 bps to 5.1%, tracking with logistics and apartment assets.
Figure 2:Trade volume slows from 2021 peakU.S. self-storage investment volume, 2013-2022
Source: Real Capital Analytics, Q4 2022. Data extracted March 9, 2023.
Net operating incomes (NOI) will remain positive in 2023 driven, in part, by existing customer rate increases (ECRIs), whereby facilities impose a 4.5% rent increase in the sixth month of tenancy and again in the 12th month. ECRIs have driven NOI gains of 200 bps above revenue per available foot (RevPAF) growth, on average, consistent with CBRE IM estimates. With an industry average turnover for self-storage facilities around 40% per year, CBRE Investment Management reasonably estimates NOI growth based on RevPAF growth except in periods of weak or falling RevPAF growth. These periods likely also feature higher turnover, leading to negative mark-to-market releasing and lost ECRI.
Sales activity is expected to pick up as economic uncertainty diminishes. Over the five-year forecast period, CBRE Investment Management forecasts a cap rate shift of 41 bps, rising just 8 bps from 2023-2024 then plateauing at 5.5% with no expansion after that.
Total return was 15.6% in 2022, and CBRE Investment Management maintains a positive outlook over the forecast period given unique secular demand drivers, with a 9.2% average total return over the five-year period (see Figure 3).
Figure 3:Total return by sector/subsectorTotal average % year-over-year return
Note. Modern office and modern logistics are not split out in NCREIF and therefore have no value for 2022 total return
* NCC signifies neighborhood and community centers
** Modern logistics was not covered in the previous forecast.
All property figures include office, life sciences, medical office, malls, NCC, logistics, apartments, student housing and single-family rentals. It excludes hotels and self storage as these sectors have no weight in NPI
Source: NCREIF NPI for actuals, CBRE Investment Management, forecasts as of H1 2023.
Overall, fundamentals are expected to return to pre-pandemic “normalcy” for self-storage assets. Street rates should continue to moderate, yet operators will likely find more upside potential in existing customer rents than street rates. Supply barriers will depress construction starts over the next 6-12 months, lowering the 2024 and 2025 forecasted completions keeping oversupply risk at bay.
Self-storage investment is a preferred strategy and is expected to attract continued investor interest given growing and broadening user demand and the sector’s inflation-hedging lease structure.
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