An Update on Self-Storage
Self-storage has established itself as a major player among CRE assets, outperforming over the past few years. Rental rates reached an all-time high of $13a2 for non-climate-controlled (non-cc) units and $150 for climate-controlled (CC) units in June 2022, tenants are renewing their leases at high rates, and net operating income increased 14 percent for some REITs. Rents grew five to ten percent year-over-year by 20 of the top 31 metros for non-CC units, and five percent in ten of the top 31 metros for CC units. Among those metros, eight were in Southern markets.
Impact of Inflation
Concerns of inflation are echoed across every product type in commercial real estate, but how does it affect self-storage facilities? With the current inflation rate of 8.5 percent as of May 2022, the cost of goods and services is rapidly increasing. According to Yardi Matrix, storage executives believe the segment is well-positioned to endure an inflationary environment. With short-term, monthly leases and a fixed-base expense model, self-storage has proven to be a stable investment. Owners have the ability to raise rents quickly, resulting in the asset-class outperforming its counterparts. Oftentimes, asking rates for vacant units fluctuate daily, usually in a positive direction. Total units vary by property, but the average base ranges from 200 to 900 units. Tenants rarely move and only experience small increases (ex. $10 to $50), which in the long run create large jumps in revenue for the facility when it’s spread across hundreds of units. However, at a certain point, there comes a time when customers cannot afford to continue to pay more.
In the month of April, metros in the Sunbelt saw the highest rent growth, with Tampa, Miami, Atlanta, Charlotte, and Charleston leading the way for both non-climate-controlled and climate-controlled. Demand is primarily driven by the red-hot housing market in these metros, as well as the incredible in-migration due to work-from-home policies, job growth, and business-friendly government policies.