Current Self-Storage Challenges and How We’re Addressing Them
One of the benefits of certain alternative investments, like self-storage, is that they aren’t directly impacted by stock market volatility. Historically, for example, the threat of recession has not lessened demand for self-storage. In fact, self-storage can actually have a positive outlook in the face of an economic downturn.
In 2020, for example, we saw demand for self-storage achieve historic highs, as people relocated at record rates and consolidated households. At the same time, the stock market and bond markets suffered through the highs and lows of economic uncertainty and investor anxiety.
This isn’t to say self-storage isn’t entirely immune to up-and-down market cycles. In fact, in the years of global recovery following the pandemic, the rate of growth slowed as the market moved to correct itself (though demand still remains above pre-pandemic levels).
But rather than be at the mercy of investor sentiment and global events, our industry tends to be impacted by different factors and often on a micro-economic scale.
The success and challenges our facilities face can often depend on more local factors such as:
Whether the surrounding community is growing or decreasing in size
New facilities popping up in the region
Local regulators and rulings
Though, there are still some macroeconomic challenges that our team at Belrose keeps a close eye on when facilitating an acquisition or sale. Let’s take a look at what these current challenges are and how our team is addressing them.
Challenge #1: High Interest Rates Mean Decreased Demand
Have you noticed how expensive houses are lately? After dropping down to historic lows during the height of the pandemic, mortgage rates increased nearly 5% from 2021 to 2023. While rates have slowly started to cool off, housing prices continue to inch up. Year-over-year, housing prices increased nationally 4.9% this past May, and are expected to climb another 3% by the same time next year.1 In certain local housing markets, especially within desirable neighborhoods or cities, it’s not unusual to see increases that are even higher.
These costs have proved prohibitive for many first-time homebuyers, and the rate hikes mean many are opting to stay put or rent their home instead of selling for the time being. Fewer people buying and selling means decreased demand for a place to store those moving boxes– the number one reason for renting a self-storage unit.
How Belrose Is Addressing It
Diversification is key to reliable investment strategies, and syndicated real estate is no exception. Thanks to inflation, tighter belts mean Americans are taking fewer vacations abroad and spending more time enjoying leisure activities here in the States. The development of boat and RV storage hasn’t yet kept up with the jump in consumer purchases, making this sector ripe for investors.
We’ve found success so far in incorporating alternative types of storage within our investment portfolio, and we will likely pursue more opportunities in boat and RV storage as they arise.
Loans Are Harder to Get
Commercial real estate investors are finding funds harder to come by lately, with investment capital projected to cost 3% to 5% more than it has in previous years.2 Why? While inflation has hiked interest rates across the board, borrowers have also been burned by underperforming projects like corporate office buildings (as remote work continues to remain a popular choice for office workers).
Approximately 20% of commercial real estate loans nationwide are due for repayment in 2024.2 After a tough 2023 necessitated short-term extensions for hundreds of billions of loans, bankers are wary of taking on new risk. When they do, it may be more costly.
How Belrose Is Addressing It
One way our team works to mitigate the challenges of more stringent lending is by finding opportunities for seller financing through off-market deals.
How does this benefit you? Seller financing typically involves interest-only payments, which means more cash flow for investors. Generally speaking, this type of financing does not have loan covenants (certain conditions or restrictions that borrowers must meet), which again can be a notable advantage of seller financing.
Increased Competition
Last year, spending on self-storage facility construction hit an all-time record, over $6.9 billion, to be precise.3 Those looking for alternative investment opportunities that can potentially address their investing goals have been quick to realize the benefits of self-storage investing. The downsides to this growing popularity are increased competition for investors and oversaturation in the market. High-demand cities have been flooded with new builds due to overzealous construction, which can make it difficult for facilities (especially older or smaller mom and pop shops) to remain profitable.
How Belrose Is Addressing It
How do you turn a profit when everyone else is in on the action? You carve your own path. To help our facilities stand out from the crowd, we have on-site teams who renovate, modernize, and market our facilities using proven marketing strategies. We closely evaluate the competitive landscape of any region in which we’re considering establishing or purchasing a facility. Our team is well-equipped to find and cultivate promising opportunities for our investors as we stay ahead of the curve.
Younger Generations are Storing Less
Millennials represent the next wave of potential consumers in the self-storage sector, but a shift in values means they’re buying—and therefore storing—fewer possessions. Gone are the days of china hutches and collectibles, as this generation trends toward minimalism.-
How Belrose Is Addressing It
While this demographic may have fewer possessions, millennials still use self-storage facilities more than any other age bracket. Digital nomads, globe-trotters, and those trying to save up for a home or pay off debt mean that 25% of this generation actively uses storage facilities.4 Remote work lifestyles and rising rental costs in popular cities also account for an increase in demand, which may grow with millennials and future generations.
Is Self-Storage Investing Right for You?
Regardless of social trends or economic fluctuation, self-storage continues to present advantageous investment opportunities for those looking to safeguard and grow their finances. If you’re interested in learning more about our recent acquisitions and upcoming opportunities, we invite you to reach out to our team today. Schedule a call with Belrose CEO Joe Downs to learn more.
Sources:
1US Home Price Insights – July 2024
2Last year was bad for commercial real estate. 2024 could be worse.
3Self-storage development hits pause after record year for spending
4Nearly a Fifth of Americans Rent Self Storage, with Millennials in the Lead