Without question, 2020 proved to be a very unique and challenging year and the anxiety related to the coronavirus made most investment reports irrelevant. However, it is clear that each part of the country is experiencing a different amount of disruption. Argus is the only national full-service self-storage advisory group comprised of third-party management, investment sales and advisory services, which gives us a unique, all-encompassing perspective for self-storage owners throughout the country. Below we have tried to touch on some key points regarding the investment markets as we head into 2021.
We have seen self-storage perform very well during the 2020 pandemic. Due to the shutdown in March, the leasing season, which usually starts in April-May and ends in August-September, was delayed until June-July and ended in October-November, which is usually a period when seasonal dips in occupancy are expected. At this time, we have continued to see fewer move-outs during this same period. New demand drivers such as remote work, home remodels, migration out of urban city centers, remote learning and the continued disruption in the restaurant and small business sectors continue to fuel the growing demand for storage space. Because of this, the industry is experiencing historically high occupancies with self-storage REIT portfolios reaching 95% occupancy by mid-September. It is clear that the COVID disruption has driven demand higher and the new demand drivers will remain sticky for an extended period of time. This will lead to very strong performance in 2021!
The transaction market paused during the spring and early summer as the pandemic caused turmoil within the investment community and capital markets. However, the well-documented performance during the shutdown lead to an uptick in investor sentiment as we entered the summer months. The stabilization of the debt markets and continued low interest rates have fueled an acceleration of transaction velocity as we head into 2021. Today, fewer self-storage listings on the market and more flow of capital into the industry have increased competition for a limited number of stabilized assets and have led to cap rate compression of 15-30 basis points, all while continuing to push historically high valuations. Investors continue to find yield and value in secondary and tertiary markets which benefit from little to no new development and the pandemic-driven migration out of urban city centers. The spread between major market and secondary market cap rates will narrow as secondary markets continue to outperform major markets. 2021 will undoubtably be a very active and aggressive transaction year with many investors seeking constant yield. Self-storage once again is proving to be a very resilient and durable sector.
Over the last five years, we have seen a tremendous boom in self-storage development around the country. Heading into 2020, we anticipated a slight slowdown of 3%-8% in new development largely due to softening market fundamentals and declines in rental rates. The pandemic disruption accelerated the slowdown in new development as lenders pulled back, making new construction loans very difficult to obtain. Comparatively speaking, development in 2020 for new self-storage properties is down 10%-20% over prior years. Although some new facilities did break ground in 2020, the pause button was pushed on many planned and proposed projects. In certain markets, this was a welcome sign as newly constructed properties were having to implement aggressive rate discounts to achieve leasing velocity. We feel new development in 2021 will continue to be delayed.
Investors will continue to find value in secondary and tertiary markets around the country with many of these markets experiencing aggressive population growth and strong operating fundamentals. However, in 2021 investors will also start to find value in newly constructed projects in major/core markets that have failed to achieve proforma rents and leasing velocity over the last 2-3 years. Though these opportunities will be heavily marketed, we believe investors with deep pockets and long investment horizons will find value at or below replacement cost next year. Expansion opportunities on existing stabilized properties and the conversions of failed retail big boxes will continue to be on the forefront of investors’ minds. Lastly, we will see technology widen the gap between operators; we project 50%+ of future rental activity to be generated online and the introduction of technology such as digital rental apps becoming more important to the success of a property. The continued refinement of “unmanned” stores will start to make major headway in 2021 and we will see major investments made to automate the day-to-day operations of self-storage properties.
We should all be very thankful to be in the self-storage industry which experienced very solid performance throughout 2020 and has a bright outlook for 2021. While we are experiencing a once-in-a-lifetime social and economic disruption, I am very hopeful that a vaccine will be widely available and distributed next year. We will likely see even stronger valuations in 2021 due to an increase in investor confidence, a slowdown in new development, better and more useful technology and the very well-documented performance of self-storage during this pandemic.
Ben Vestal, CEO of Argus Self Storage Advisors, can be reached at 800-557-8673 or email@example.com.