Dream Storage Newsletter - July 2024

Monthly Newsletter

In our July edition of the Dream Storage newsletter, we share insights from the self-storage industry and transaction market.

Market Insights

Rachel and Chris attended an owner’s summit on July 18th, featuring leading public and private operators, developers, investors, and lenders. Joe Margolis, CEO of Extra Space Storage, and Michael Schwartz, CEO of SmartStop Self Storage REIT, shared key market insights. Margolis noted that Extra Space has navigated challenging environments over the past 20 years with only one year of negative revenue growth (a 3% decline in 2009). While revenue growth is relatively flat for 2024, acceleration is expected due to diverse customer demand. Schwartz highlighted SmartStop’s 20% average ECRI (“ECRI” means existing customer rent increase) with low customer attrition and anticipated double-digit rent increases. However, both Schwartz and Margolis are cautious about continuing large rental rate hikes, as such increases could damage the industry’s reputation, customer experience, and invite regulatory scrutiny. Margolis added that Extra Space is focusing on fair and sustainable ECRI strategies and may allow in-store managers to adjust rates in response to customer complaints.

Margolis noted that he has seen a decrease in new self-storage deliveries nationwide, with competing properties opening within a 3-mile radius of existing stores dropping from 29% in 2019 to 13% in 2024. The company’s capital allocation focuses on redevelopment and expanding existing facilities, with a nearly $1 billion pipeline and yields of 9% to 11%. SmartStop is expanding with 15 new developments in Toronto, adding to its 23 existing properties.

Per Extra Space’s recently issued Q2 2024 reports (link below), Extra Space reported a modest 0.6% increase in same-store revenue, but a 1.1% decrease in same-store net operating income due to rising operational costs. Operating expenses rose by 6%, driven by increased payroll, benefits, marketing, and maintenance costs. Same-store occupancy improved slightly from 94.0% to 94.3% year-over-year. Despite its market power and access to data, Extra Space completed the acquisition of only two existing stores and one Certificate of Occupancy store, totaling approximately $27.6 million. The company also finished two developments with joint venture partners costing about $28.7 million. Lastly, Extra Space added 77 stores to its third-party management platform, resulting in a net gain of 14 stores.

Dream Storage’s Outlook

After meeting with various owners and brokers at the summit, we find ourselves in the company of reputable firms that have not yet transacted in 2024. Despite the market headwinds, we remain dedicated to sourcing new opportunities and leveraging our existing network. Both equity and debt remain interested in the self-storage sector. Although the transaction market is somewhat volatile, with some deals falling out of contract, we (and many of our colleagues) are surprised by sellers' demands and the willingness of some buyers—such as 1031 buyers and private equity groups unfamiliar with storage—to meet those demands. We continue to write offers, revisit strategies, and adhere to our rigorous underwriting practices (informed by our extensive experience as operators, which significantly distinguishes us from many of our competitors).

We remain optimistic for 2024 and 2025, with more deals coming to market compared to this time last year. Leveraging our experience and relationships, we access numerous off-market deals and receive second looks at opportunities that have fallen out of contract but have not yet been circulated to the broader market. We look forward to sharing the next opportunity with you.

The Dream Team