Many investors in today’s market are wondering what commercial assets are viable investment opportunities given the risk of COVID-19. In recent weeks, medical office and self-storage have emerged as assets that are resistant to market volatility. Let’s talk about the cosmetic underdog between the two and identify reasons self storage can withstand an unexpected pandemic:
Versatility In the Age of COVID-19
We have frequently touched on why self storage enjoys steady occupancy rates in both “up” and “down” economies, but COVID-19 is a new animal that could lead one to believe that storage rental activity would see a sudden drop – however experts predict storage will remain resilient and the industry could see a boost in activity over the coming weeks:
With more than 16 million unemployment claims since mid-March and 56,000 claims in Montana alone, residential landlords are bracing themselves for impact from jobless tenants now unable to pay rent. If this pattern continues and the stay-at-home order is extended into the summer, we may see renters start to condense and quarantine back into homes with parents or other roommate options. Though this could suck cash flow from the apartment owners, this would create a need to store items during this time of downsizing. If you think about it, it seems far more reasonable to spend $30/month of your stimulus check on a storage unit than $600/month on an apartment if you’re unsure of when you’ll be heading back to work.
Universities and Student Housing
Student housing is being displaced, but is not lost. Many storage operators are concerned about lost revenue from students as housing pre-leasing/reservation activity for the 2020-2021 year has come to a screeching halt, but that doesn’t mean it won’t return. Yes, a handful of students may choose not to return to school next year, but many will. Those who are already enrolled and have existing storage units could keep their unit reserved through the summer rather than vacate while they wait to see what happens, eliminating some turnover operators have seen in the past.
Stay-At-Home Orders and Businesses
What the office and retail world looks like moving forward is a hot topic at the moment. Many anticipate “business as usual” will not happen for up to a year after the economy opens back up. Many businesses are looking at downsizing or moving to a more remote work model. This could translate into vacant retail and office suites with businesses looking for temporary storage for equipment while they figure out their next move.
Dropping Interest Rates Are Not Resulting in Lower Cap Rates
If you’re looking toward liquidity and/or retirement, now is a good time to consider placing your storage facility on the market due to a favorable swing in investor interest in the asset class and low interest rates. Keep in mind that today’s lower interest rates are not directly translating into lower acquisition cap rates due to the risk of the Coronavirus. Cap rates for storage facilities are still aggressive between 6.5% – 7.5% in Montana and owners should plan on those rates holding even with interest rates dropping. Buyers have the opportunity to take advantage of a wide basis point spread between yield and the 10-year treasury.
Delayed New Developments Could Help Existing Rental and Vacancy Rates Hold
A number of development projects have entered a holding pattern or have dropped off completely since the US Coronavirus outbreak. The self storage industry could see a leveling off in new supply being brought to the market, allowing vacancy rates which are currently averaging just under 10% to hold steady through 2020 and 2021. In terms of rental rates, while operators may be facing a challenge with existing tenants in the coming months with late payments, etc. it’s believed for reasons mentioned earlier in this article that new rental inquiries should stay active and owners should work to hold existing rates steady for new customers.
Montana Storage Rates Across the State
Rental rates in Montana have continued to hold, with very little fluctuation in markets such as Missoula and Billings year over year. Bozeman saw a 10.82% decline in climate rates versus Q2 of 2019 but overall rents have either held flat or experienced a slight increase.