As we reflect on the year 2022, there are a lot of things to discuss regarding the current state of the self-storage market.
Self-storage is often deemed as “recession resistant.” While I strongly believe that storage is one of the safest and top performing real estate asset classes to invest in, it is not immune to the ebbs and flows caused by the Fed. There is a lot going on in the economy, and depending on who you talk to or where you source your news from, we are either getting ready to enter a recession or we are already enduring one. As the Fed prepares to meet again in March, we may be in for another increase in basis points and will certainly have a better handle of where the market is projected to go. In the meantime, we can assess conditions with looking at the very recent past.
Many active self-storage owners and investors are very aware of how well self-storage performed during the pandemic. A pandemic that consisted of high occupancies, high rent growth, and low interest rates. We are, however, currently amid of a bit of a different market and self-storage investors need to know not only what is in store for 2023, but also how self-storage performed in the fourth quarter of 2022.
During the week of 3/6/2023, the five biggest self-storage real estate investment trusts (REITs) – CubeSmart, Extra Space Storage Inc., Life Storage Inc., National Storage Affiliates Trust (NSAT), and Public Storage Inc. released their financial results for the fourth quarter of 2022. We take a deeper dive into some of the highlighted statistics from each REIT below.
Results Through the Fourth Quarter of 2022
- Same-store NOI at 521 of CubeSmart’s facilities grew 12.1% year over year. This is largely attributed to a 9.5% increase in revenue and 2.3% increase in operating expenses.
- Same-store physical occupancy was 92.1% as of Dec. 31st, down from 93.3% in 2021.
- Extra Space
- Same-store revenue and NOI increased 11.8% and 13.4% compared to the same period in 2021. Same-store occupancy was 94.2% as of Dec. 31st compared to 95.3% a year prior.
- Life Storage
- Same-store NOI increased 13% compared to 2021 and same-store revenue increased 11.8% year over year, impacted by 14.7% bump in rental rates.
- Overall occupancy as of Dec. 31st was reported at 90.6%, down from 93% a year ago.
- Same-store NOI was up 9.4% primarily driven by a 7.4% increase in same-store revenue and partially offset by a 1.6% increase in same-store operating expenses.
- Public Storage
- Same-store revenue increased 13% over the same quarter in 2021, primarily due to higher realized annual rent per square foot and partially offset by a decline in occupancy.
- Operations costs for same-store facilities went up 4.1% compared to the previous year.
With all the information given, the question begs, how should self-storage investors and owners process all this data? What does it tell us?
Based on the statistics given in the fourth quarter reporting, revenue is going up and occupancy is in a slight downward trend across the board. During the pandemic however, occupancy was at record highs. Looking in the rearview mirror for the 4th quarter, we can expect national occupancy numbers to come down from their boosted highs and slowly return to normal. Even with this decrease, owners should expect revenues to increase due to the rising street rates nationally which will continue to increase NOI even with occupancy being lower.
Furthermore, buyers should see the opportunity in this trend. During the pandemic and even coming out of it, we were seeing boosted occupancy and NOIs mixed with low interest rates providing record highs in facility valuations. With occupancy lowering and interest rates rising, even boosted NOI is causing valuations to decrease. Buyers in this market can be comfortable in finding value in purchases which all but vanished in 2021 and onward.
With decreased valuations in mind, it is extremely important for potential buyers to sharpen their pencils and heavily dig into due diligence on facilities they are looking to acquire. This means requesting three to four years of financials, management reports, and occupancy reports. In addition, analyzing the market the facility is in and seeing if there is demand for storage or seeing if anything is being built or expanded in the area is vital.
Overall, we can see that self-storage is still a high performing asset class. Even with decreasing occupancy and market valuations, NOI continues to rise year over year proving that this is a safe asset class to park money. Self-storage has historically performed well in recessions, and I expect much to be the same in 2023.
If you would like a free and honest valuation of your self-storage facility, our team of self-storage experts would be more than happy to put together one for you. Contact any member of the Bledsoe Self-Storage Group today to help you get started.