Good News For Consumers Means Bad News For Self-Storage Investors As Summer Rental Rates Continue To Drop
The bloom is off self-storage investment, which became a can't-miss opportunity during the pandemic as people cocooned in their homes, built offices and gyms and moved their displaced belongings.
But rental prices for new storage tenants are dropping at unprecedented levels, and investors who went all-in in the past two years are now feeling the pain.
According to Green Street, self-storage prices for new customers dropped 10% in the first quarter, following a similar drop in the fourth quarter of 2022 to $15.45 per square foot. It's the most significant decline since the commercial real estate research firm started tracking rates in 2013.
There are currently around 50,000 self-storage facilities in the U.S. and more than 1 in 10 households rent a facility, with 70% used by residential customers, according to a U.S. Self Storage Industry Statistics report released at the end of January.
The summer months, typically a peak storage demand season, have seen new customer rents drop 8% lower than in the second quarter of 2022, Green Street senior analyst Spenser Allaway told The Wall Street Journal. The Financial Times Stock Exchange (FTSE) Nareit Equity Self Storage index has also fallen more than 20% since the end of 2021, reflecting weakening demand, rent and occupancy.
Bloomberg reported this week that even Blackstone Inc.'s (NYSE:BX) $68 billion real estate trust felt the need to sell its Simply Self Storage to Public Storage (NYSE:PSA) for $2.2 billion as the property vehicle was dealing with investor withdrawals and upheaval in the commercial property sector.
Extra Space Storage (NYSE:EXR) missed the Zacks Investment Research consensus estimate of $2.12 per share by 6 cents and is down from $2.13 per share a year ago. Extra Space Storage shares have lost about 7% since the beginning of the year versus the S&P 500's gain of 17.6%. The WSJ reported last weekend that Public Storage is offering incentives to new renters, including charging only $1 for the first month's rent.
Extra Space CEO Joe Margolis said that while his facilities remain nearly full, post-pandemic rates continue to drop, and this summer, so far, has been disappointing.
"We maintained strong occupancy of 94.5%, driving same-store revenue growth of 2.7% in the quarter, despite exceptionally difficult year-over-year comparables from pandemic highs," he said. "We have revised our outlook for the back half of the year due to lower-than-expected new customer rates in June and July."
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