Dream Storage Newsletter - November 2023

Monthly Newsletter

Approaching the end of 2023 has offered us the chance to assess the diverse market conditions contributing to a slower pace in self-storage transactions. Primarily, buyers, ourselves included, have hesitated to meet seller pricing expectations amidst a high-interest-rate environment. Additionally, while the storage sector remains resilient, several operators, including three of the four REITs, have adjusted their projections for the latter part of 2023, considering broader market challenges. These insights, detailed below along with accompanying articles, have equipped us to gear up for what we anticipate to be a much busier 2024 filled with buying opportunities in the upcoming months.

Market Insights

Despite the challenging market conditions impacting various asset classes, the self-storage REITs have shown resilience with positive same-store NOI growth, largely driven by rental rate increases among existing customers. However, these REITs are grappling with decreased occupancy and lower move-in rates, prompting three out of four to revise their final quarter projections. The Q3 numbers for Public Storage, Extra Space, NSA, and CubeSmart have been summarized by CBRE’s Self Storage Advisory Group for your convenience. Notably, same-store revenue guidance for the remainder of 2023 has been adjusted down from 4.41% to 3.38% among the REITs, but remains positive overall.

Looking at the broader picture, the yield on the 20-year Treasury has declined post a strong Treasury Department auction. This, along with the CPI coming in lower than anticipated earlier in the month, has led analysts and policymakers to speculate that the Fed might halt rate hikes. The upcoming December meeting is likely to provide more insight into when the Fed might consider reducing rates.

Dream Storage’s Outlook

At Dream Storage, we have consistently highlighted the acquisition opportunities that exist due to fractionalized ownership in the self-storage sector (with nearly 50% of facilities being owned by small business owners, with some publications reporting an even higher percentage). While these opportunities are promising, they do pose certain challenges for us as buyers. For instance, many sellers may not closely monitor broader market factors that influence their building's value, often leading to significant disparities between buyer and seller expectations (as witnessed throughout 2023). However, these independent owners are not shielded from the market strategies of larger operators. To retain occupancy, the larger operators have started dropping street rates with the confidence that they can recover through increased rental rates for existing customers. Unlike in previous years, where sellers could highlight their lower rates compared to competing REIT facilities in the area, this gap is now less apparent. This shift has deterred less seasoned buyers, including sophisticated private equity firms and family offices, who may lack experience in the self-storage market.

A positive shift is emerging as sellers become more pragmatic in their pricing expectations, facilitated by proactive brokers guiding them toward realistic valuations.

We do not foresee a drastic decline in rates. Instead, we continue to offer prices that align with sensible debt assumptions. Given our focus on facility size and acquisition cost, like many competitors, we place debt on these properties. Consequently, sellers are noticing and experiencing lower offer prices, enhancing their willingness to engage in transactions at figures that make sense for buyers. We are optimistic that this trend will persist, leading to increased buying opportunities in the forthcoming months.

As always, do not hesitate to reach out with any questions or comments.

The Dream Team