Speed of Action Will Be Key for Storage Investors, Franklin Street Advisors Warns
Frank DeSalvo and David Perlleshi share their thoughts on the opportunities ahead.
Much like in multifamily, investment activity in the self storage sector has been sluggish, mainly due to widely known factors. Occupancy and asking rates bottomed after a year and a half of rapidly decelerating growth, the latest Yardi Matrix report shows. As of December, the overall national street rate per square foot dropped to $16.57, a 2.7 percent year-over-year decline.
Despite all of this, storage facilities remain an attractive option for many investors, with most of them expecting lending conditions to improve later this year and transaction activity to resume. And there will be a window when savvy self storage investors will be able to capitalize on the tighter bid-ask spread before property values go up again, Franklin Street Advisors specialists cautioned.
Here’s what else Senior Directors Frank DeSalvo and David Perlleshi told Multi-Housing News about market trends and what self storage investors should expect.
Tell us more about the type of deals you were involved in last year.
Perlleshi: Overall, 2023 offered exceptional learning opportunities with the emergence of various market disruptions and rising interest rates. We observed an increase in sub-institutional sized deals in tertiary markets, particularly noteworthy given the backdrop of rising interest rates.
In terms of Franklin Street, our deal flow varied greatly, ranging from transactions involving certificates of occupancy and land designated for potential self storage sites to stabilized properties with classic fundamentals. Additionally, our reach expanded in 2023 with our first deal in Arizona.
Where do you see the most demand for self storage? Also, are there any U.S. markets you would consider underserved?
DeSalvo: In general, the secondary and tertiary markets across the country are underdeveloped or underserved. While some growth exists, these markets are not the primary focus for developers or investors. These are submarkets located 30 to 45 minutes outside of major cities such as Charlotte, N.C., Nashville, Tenn., or even slower-growing cities such as Chattanooga or Knoxville, Tenn., where growth is still positive but not as rapid.
Any market with high barriers to entry tends to be underserved. These barriers may include cities with self storage adverse planning and zoning commissions or mountain and coastal cities facing topography or soil issues. Developers who address these challenges and enter such markets have the potential to create more valuable products than those focusing on multifamily or other commercial properties.
READ ALSO: Will Self Storage Grow in 2024?
On the other hand, where does the threat of oversupply loom?
Perlleshi: The threat of oversupply exists with the multi-story, climate-controlled self storage product that is rapidly coming online in primary markets throughout the Southeast.
With so much competition in the marketplace, is adopting more technologies the way ahead? What essential features and amenities should storage facilities provide to appeal to modern residents?
DeSalvo: Introducing more technology can significantly advance a market. Implementing technology in a way that is meaningful and helpful to customers is beneficial. However, solely focusing on technology to boost profits may lead to short-term success, often failing to retain customers—or revenue—in the long run.
For example, operators are exploring the use of onsite kiosks or call centers instead of personnel, with varying degrees of success. Those that offer immediate access to live support are more successful, but not necessarily more successful than those without kiosks. Operators are also mining data to adopt dynamic pricing strategies based on availability, sometimes changing rental rates on a daily basis. While this enables operators to push rents in a strong market, it also creates the potential for market rates to plummet in a weaker market.
Today’s consumers demand essential features and amenities, such as technology and infrastructure like security cameras, gates or fences to secure a facility. Functional HVAC units are necessary for climate control, and available live support is particularly important for remotely managed facilities.
Do you foresee increased sales activity in 2024?
Perlleshi: We do anticipate increased sales activity in 2024. With the apparent stabilization of interest rates, investors have a better understanding of capital availability and lending thresholds when pursuing deals. Likewise, pricing has moderated with a slightly tighter bid-to-ask spread than in 2023.
How does 2024 look so far? What opportunities are emerging for storage investors?
DeSalvo: Today, occupancy is retracting in many major metropolitan markets as rent growth flattens or declines. But will it reverse course in 2024? Will facilities return to 85 to 90 percent occupancy as was common since 2010? Will the rent growth return? The primary influencing factor is interest rates. Roughly 25 percent of self storage movement is driven by individuals moving residences. If interest rates and inflation retract, consumers will move again and have need for self storage.
For investors, speed wins in 2024. Those investors that quickly sleuth the deals before sellers seek higher values, will capitalize on the tighter bid-ask spread. However, as interest rates start to fall, sellers will once again begin to expect higher property values.
What should self storage investors keep an eye on going forward? Do you have any words of advice?
Perlleshi: Investors must monitor overbuilding and oversupply, and understand the influences of self storage REITs in a market. In many cases, REITs are able to drop rental rates to attract customers with minimal impact to the bottom line. Smaller operators are forced to follow suit or risk dramatic occupancy drops. The result? A race to the bottom to capture occupancy where rarely does the little guy win.
When it comes to advice, return to the basics: the historically proven, simple, drive-up, non-climate structure. Today, the market is crowded with fancy new climate-controlled facilities that don’t align with the current demand for basics: a safe, simple structure for storing goods.
