Dream Storage Newsletter - December 2023

Monthly Newsletter

With 2023 nearly behind us, we share our insights on the state of the self-storage industry, the broader real estate market environment, and expectations for the following year.

Market Insights

Given the cyclical nature of real estate, the wind down in transaction activity that began mid-2022 and persisted through all of 2023 was representative of “late cycle” and not unexpected. A historic rise in interest rates, reduction in available debt financing, and lack of clarity in property valuations have all together contributed to a decline in sales volume of as much as 70% year over year as shared with us by leading industry firms.

While these conditions have certainly created distress in other real estate property types such as multifamily and office, they have yet to manifest in self-storage outside of isolated instances to our knowledge. The resiliency of operating fundamentals in our industry continue to hold as reflected by strong occupancies and positive, albeit slower, revenue growth.

Self-storage street rates, the rental rates offered to new tenants at time of move in, have experienced an average 4% decline nationwide. Nonetheless, operators have sustained revenue growth by increasing rental rates for the current tenant base, often implementing these increases just six months after customers move in. As discussed in our previous newsletter, this strategy is largely unique to self-storage and allows operators to boost facility revenue despite an overall decline in street rates. We will continue to closely monitor both rate trends and occupancies as we head into the Spring 2024 leasing season as both metrics are powerful market indicators.

Dream Storage’s Outlook

The Feds recent announcement that the current interest rate hiking cycle has ended for at least the near term, as well as the prospect of rate cuts next year, have spurred early conversations of increased transaction volume in 2024 within the investment community. While we do not foresee activity returning to the levels of exuberance seen in 2021, we do anticipate a gradual rise and return to the norm (i.e. pre-2021) for buying opportunities. Buyers and sellers will find a middle ground on values, lenders will slowly return to provide debt capital, and market conditions will continue to normalize.

What this means for our investors is better risk adjusted opportunities which simply did not exist this year. We continue to aggressively pursue these opportunities through our deep broker relationship network and evaluate them with uncompromising underwriting and due diligence standards to ensure any offering selected has the best risk reward profile.

Until then, we wish all of you a safe and Happy Holiday season!

The Dream Team