All industries felt the effects of the coronavirus pandemic. However, some sectors saw a much faster road to recovery than others. Looking towards the future, there are some industries that may even find some benefits in a world that has to make adjustments. For people thinking about self storage investing, after initial downturns in the market, there is a lot to feel positive about for the present and moving forward.
Before taking a look at the effect that the pandemic had on self-storage, it is worth considering where the industry was prior to the start of the outbreak. At that time, the market had plateaued in many areas, with many metros finding downward pressures on rents because of so much new development. The trend to decrease occupancy rate and rents had started to level off beginning halfway through 2019 as overdevelopment slowed. Still, in the most competitive markets, there was trouble filling spaces in newer projects.
The Impact the Pandemic Has Had on the Self-Storage Sector
At the start of the pandemic, there was a marked decrease in rent overall. Recently, however, we are seeing that being reversed, as rents are trending upwards. What did not change greatly over the pandemic was the occupancy rate, which remained steady or increased over last year’s levels.
The rents being lowered had a lot to do with the downward trends of rents from over-competition within the industry that had previously been in play. In attempts to fill newly vacant units after the start of the pandemic, self-storage facilities lowered rates, both introductory and for existing clients.
Now that the dust has settled, we are seeing this trend reversed, and rental rates are increasing. They are not yet what they were at this time last year, but they continue to do better, month by month with marked growth from July to August according to Yardi Matrix.
The rates are currently increasing for a couple of reasons. One reason is now that we are further into the pandemic and establishing a new normal, it is ok to re-introduce scheduled rent hikes. Property owners are still doing so at a reduced level than previously because of the pandemic. Additionally, the market has shifted as new project construction has been stalled, delayed, or even canceled because of the pandemic. This has made the market more competitive for consumers as it raises the occupancy rate.
Throughout the pandemic, the occupancy rate held steady. This number alone did not reflect the number of people who were not paying rent during the pandemic. On the one hand, this number has gone down, with unemployment benefits running out or set to expire, this may become a future problem. However, collections and evictions were often halted early in the pandemic, and now that is less the case.
Nonetheless, in the future, we expect the occupancy rate to not only hold steady, but improve, as we have seen an increase in self- storage users as entirely new markets have opened up.
What the Current Occupancy Rate Looks Like
For those interested in self storage investing, the occupancy rate is an important consideration, and the outlook is rosy for the self- storage industry. In the second quarter of 2020, according to Marcus and Millichap data, 92.2% of units were occupied.
There have been multiple new markets opened, leading to this strong performance. There were college students who had to leave campus immediately and wanted space to store their belongings while they headed home. Meanwhile many families have relocated, heading from cities to suburbs or moving in with extended family. People needed storage units to downsize and relocate. There was also a large need to clear out space as families had to now work or school from home. This is something we expect to see more of as people adjust to a life that is altered by the pandemic.
As much as things have changed, people’s need for storage units has remained strong. During the pandemic, self-storage units had a distinct advantage over other forms of storage, as it allowed for safe social distancing. This concept is not likely to go away soon, and accounting for this is likely to provide further benefits.
Future Outlook for Self Storage Investing
What Considerations Should Goes into Financing Self-Storage Facilities?
When thinking about self storage financing, one important consideration is where the market is headed. Investors would do well to look into the advantages of automation which proved an asset during the pandemic. Simple touches, like electronic locks and a robust online platform can make a big difference in both the safety during the pandemic, and in easing the mind of consumers looking forward.
Looking forward at the trends of financing self-storage facilities, there are two main takeaways. While overall, activity tends to correspond with the market, the self-storage industry has nonetheless remained strong after taking initial losses in March and April, when nearly everything else grounded to a halt. The strength of the industry in the face of a volatile market bodes well for the future and is supported by being an industry that has seen growth as a direct result of the pandemic.
Meanwhile, we are just again beginning to see self-storage financing funding projects. It is important to keep in mind that lesser established facilities have sometimes entered oversaturated markets that have trouble filling units and cause overall downward trends of rent in that specific market. In fact, looking forward, internal over-competition is more of a threat to the industry’s growth, than from the pandemic.