The Self Storage Transaction Environment – 2023 to Current

Self Storage Popularity

April 17, 2024

2023 saw a major slowdown in self storage transaction volume. Aside from the monster acquisitions/mergers Extra Space ($11.6 billion) and Public Storage ($2.7 billion) made, most investors and brokers saw transaction volume down anywhere from 50% to 80% from peaks in 2022. The main reason for this slowdown was and remains to be the difficult interest rate environment coupled with the resulting decrease in housing sales.

During the COVID period, it was very common to see cap rates in the 4-5% range on existing or trailing numbers. Additionally, interest rates were anywhere from 2-4%. So, despite the low returns, investors for the most part were buying facilities with positive leverage due to the fact cap rates exceeded the cost of capital.

This scenario has completely inverted over the last 2 years so that investors are now purchasing deals with trailing cap rates below or sometimes far below their cost of capital creating negative leverage. So, your cap rate or return maybe higher (6-7%) than what you might have found from 2020-2022, however due to interest rates being 7.5%+, your Return on Equity is going to fall below your Return on Cost meaning you now have severely diminished cashflow.

It is interesting to note that Cubesmart announced recently in their Annual Report for 2023, they only purchased 1 facility for $22M during the entire year of 2023. They attributed this lack of transaction volume to “volatility in the capital markets (which) created dislocation in the transaction market and limited the opportunity to find investments with attractive risk-adjusted returns”.  Cubesmart’s 2023 Same Store NOI Growth was 4.2% while Same Storage Revenue Growth was 3.5%.  They had the best NOI growth out of all of the publicly traded REITs aside from Public which saw 4.7%.

The worst performer out of the publicly traded REIT storage operators was NSA (National Storage Affiliates). It was reported in their Annual Report for 2023 they sold off a portfolio worth $540 million and they contributed approximately $347 million of “assets” to a Joint Venture in order “to realize compelling value for that group of properties while retaining the rights to bring those assets
back onto our balance sheet when the time is right.” NSA’s Same Store NOI Growth was 1.6% in 2023.

I continue to underwrite deals where seller’s expectation do not align with the current market conditions. Why should they if the seller is not in a position where they have to sell. Most of the owners I have spoken to want to sell but do not need to sell, so they can wait for the right environment to get their price. I don’t believe we will see the environment that we had from 2020-2022 again, at least anytime soon. However, we might be stuck with high interests much longer than anticipated. Hopefully, housing will rebound in the summer bringing with it increased demand for storage and higher occupancy and rental rates. This would certainly help make some of the deals pencil out a little better.

With all of that being said, the deals that make sense are still out there. It just takes a lot more digging to find them. Demand has continued to increase while supply has drastically decreased.

Reach out to me today if I can be of any assistance underwriting a potential new acquisition or providing you with a broker opinion of value for a deal you are interested in bringing to market.

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