Self-storage had a strong start during 2010 to 2015. Limited supply and high demand drove development to record highs in 2018, which ultimately tipped the scale, causing an imbalance of supply and demand in many markets. While new developments are trending downward since 2019, the period of 2016 to 2020 still resulted in a 17% increase in national supply of self-storage. The onset of the global pandemic in 2020 only created a new set of challenges for self-storage investors to navigate.
Whether you own and manage your own facility or invest in self-storage real estate investment trusts (REITs), here are four things self-storage investors should know in 2021.
1. Expect flat or decreasing rental rates
Rental rates have already had tremendous pressure from oversupply in many markets, but the coronavirus pandemic has only perpetuated that problem, as low lease rates have driven rental rates down even further.
The third quarter of 2020 found a -2.6% decrease in rental rates on a national average, with some markets, like Southeast Florida, seeing as much as a -6.7% rent change. Markets with the least amount of supply in development are able to absorb current demand more efficiently and will be least impacted by flat or decreasing rental rates. As of the third quarter of 2020, Salt Lake City, St. Louis, and Phoenix were the only major metro markets to see no rental change quarter over quarter.
2. Increase in existing facilities for sale
Self-storage REIT giants, like Public Storage (NYSE: PSA), Extra Space Storage (NYSE: EXR), CubeSmart (NYSE: CUBE), Life Storage (NYSE: LSI), and National Storage Affiliates (NYSE: NSA) make up roughly 20% of the self-storage market share. This means the remaining 80% of facilities across the nation are owned and operated by individual investors, including mom-and-pop owners.
These small-scale investors typically sell the property during life events, such as retirement, divorce, or other circumstantial events. With an increase in financial challenges as a result of the ongoing pandemic, there could be an increase in property owners bringing their property to market in 2021 and beyond.
3. Demand may increase as moratoriums expire
Self-storage is in the business of change. When people move, downsize, relocate, or get divorced, among other life events, the need for storage increases. Surprisingly, occupancy rates have remained around normal levels based on national averages for 2020, although move-ins and move-outs have decreased. It appears sheltering in place has motivated more people to stay in their rental unit than what's happened traditionally.
That means rental rate compression is still largely thanks to oversupply. Right now, tenants and homeowners at risk of foreclosure or eviction are protected through national or state moratoriums, meaning the need to move, downsize, or relocate isn't there. But as these moratoriums expire, there will likely be an increase in need for self-storage, which could push rental rates back to normalized levels.
4. Secondary and tertiary markets will lead the way in 2021
As tenants and businesses flee primary markets across the nation, it appears secondary and tertiary markets will hold the biggest opportunities for investors in 2021. According to Cushman & Wakefield's (NYSE:CWK) most recent investor survey, investors expect cap rates to remain elevated at roughly 5% for Class A facilities, 6% for Class B facilities, and 7% for Class C facilities. Properties in suburban and secondary markets typically go for less, meaning investors who want to purchase or develop existing facilities may want to look outside major markets for better pricing and less competition.
The Millionacres bottom line
There is still a large appetite for storage facilities, despite current downward pressure on rental rates. Thankfully, the self-storage sector has fared far better than others in the commercial space.
While it's not the most profitable moment to be in self-storage, there is still a lot of opportunity and resilience in this asset class. I expect to see continued expansion among self-storage REITs and individual investors in 2021. Investors should be cautious when evaluating opportunities, particularly in markets that are oversupplied.