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America is a country with 350 million consumers and when many people buy products throughout the year, many of them will end up with a lot of things. This explains the long-term success of the self-storage industry. The real estate sector is set to reach a record high in 2022, but new market data suggests the sector may cool down and return to pre-pandemic performance.
The self-storage sector is not the “sexiest” in real estate but it is extremely profitable. This is because the self-storage business model is perfect in its simplicity. Self-storage is a service that people need in almost every market in the country. A near-permanent customer base means an ongoing source of revenue and the cost of self-storage facilities is generally lower than residential or commercial real estate.
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Few self-storage REITs have a strong track record of generating passive income and Realty Income’s self-storage REIT has earned Dividend King Status. Even by those standards, 2022 is a very good year for the sector. Commercial real estate giant Cushman & Wakefield monitors the sector and its data shows that 2024 will be weaker than 2022, but this does not mean that self-storage will decline.
Cushman & Wakefield reports that the total transaction volume of the sector is $ 3.36 billion in the first six months of 2024. This is an impressive figure, but there is a sub-one percent increase in the first six months of 2023. Cushman & Wakefield analysts surveyed noted that the number 2024 more closely resembles the performance of the sector before the high performance of 2020-2022, when the sector does $50 billion per year.
Despite strong demand from the self-storage sector, it is not immune to the effects of higher interest rates and inflation. Higher interest rates led to higher capitalization rates in the sector, which increased by 90 basis points (compared to 2022) to 5.9%. However, dollar returns per square foot decreased, particularly in the Midwest (11.2%) and the South (10.1%).
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Some of the decline may be due to lower demand as consumers tighten their belts and refrain from buying or cutting back on unnecessary spending. A storage unit full of stuff that people don’t use always qualifies as an unnecessary expense, which is why some cancel the lease. Consequently, self-storage facilities must lower rents to maintain housing.
Because the market value of commercial properties such as self-storage facilities is based on the income generated, the decline in the dollar-per-square-foot ratio also affects the sector’s property values. Cushman & Wakefield’s analysis revealed that property valuations in the sector have declined in the A class ($190 per square foot) and B class ($124 per square foot) segments. That decreased by 20% (class A) and 15% (class B).
Overall, the figures are not at record highs in 2022 but remain in line with the sector’s performance from 2013-2020. Most investors are happy with the sector’s performance over this period and returns to investors will increase their wealth slowly, but still profitably.
The 50 self-storage experts surveyed by Cushman & Wakefield appear united in their belief that there is room for better sector performance in the second half of 2024. They forecast increased investment due to uncertainty about interest rates and the lost presidential election. So, if you are looking for passive income investments, the numbers are still good in the storage sector, although not as much as in 2022.
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This article A Look at What the Future Holds for Self-Storage Investors originally appeared on Benzinga.com
