Latest Fed Increases Causing Uncertainty and Anxiety Within Self-Storage Industry
Uncertainty regarding the economy has hung over the United States and the world since the beginning of the pandemic in 2020, but the latest federal rate hike of .25 percent has caused even more uncertainty and hand wringing within the self-storage industry.
“The feds keep leaking what they might or might not do, but we just don’t know and that’s created a lot of uncertainty,” says Neal Gussis, co-founder, and principal at CCM Commercial Mortgage in Chicago, Ill.
The Federal Reserve’s latest rate hike came the first of February and was the eighth increase since March 2022, a process that started to help slow down inflation rates that haven’t been seen in nearly 40 years.
While Fed Chairman Jerome Powell gave some indication that the moves were starting to work, he also indicated there might be more increases in the offing. “We can now say, I think for the first time, that the disinflationary process has started,” Powell said at a post meeting press conference while adding it would be “very premature to declare victory or to think we really got this.”
As many operators last year noted a softening of the market in occupancy and rates and while awaiting Q4 earnings reports from the REITS, many within the industry are getting jittery about 2023 and beyond.
Those who were in the industry during the Great Recession (also called the Great Financial Crisis) of 2008-2011 are also beginning to worry any future recession may bring occupancy to the historic national average low of 75.7 percent in 2010.
To best guess whether the self-storage industry will respond with historic low occupancies as in the Great Recession, industry financial experts say we first must look at the similarities and the differences between 2008 and the likely impending recession today.
“What was going on then was very different than what is happening now,” explains Shawn Hill, principal for The BSC Group in Chicago, Ill., “For one the fear of consumers was very palpable, it seemed as if the entire financial system was about to crash.”
Indeed, the main cause of the Great Recession was very different. “The cause of the Great Financial Crisis was related to housing,” says Chris Sonne, executive vice president of Self Storage Valuation Practice at Newmark in Newport Beach, Calif. “That was a financial crisis not caused by normal macroeconomic metrics such as job growth and other factors.”
Experts point out consumers haven’t shown the fears they did during the Great Recession, largely because there haven’t been record breaking housing foreclosures and devaluation or job losses.
“While consumers are seeing some headwinds, due to a lack of real estate inventory, there is still a strong housing market and buyers for homes, even with the rates increasing,” says Aaron Swerdlin, vice chairman for Newmark Group, Inc. in Houston, Texas.
During the Great Recession, there was an 8.7 million jobs loss. The employment market did not recover those jobs until a full seven years after the recession officially began in 2007. Currently, the January 2023 jobs report showed many sectors adding jobs, while unemployment fell to 3.4 percent.
Recent Economic News Doesn’t Equal No Effect on Self-Storage
The differences between the Great Recession and today are many and because of that, financial experts in the self-storage industry do not feel this recession (if there is one) will have the same effect on operations.
Still, there have been and will continue to be some effect on current operators and developers.
“Before the Great Financial Crisis (that began in 2007), self-storage was always more academia. People thought it was “recession proof,” says Steve Mellon, senior managing director of JLL in Houston, Texas. “That financial crisis proved we were recession resistant, not recession proof.”
Mellon says even with that crisis, the industry went “backwards” for maybe 1 ½ years, “but then we popped back. When we look at foreclosures, the industry was the second lowest class.”
Mellon continues, “Covid was another mini-test for us, everything suffered the first three months of Covid, but when we look at the resistance, we came out as one of the hottest markets in the industry.”
Occupancy did soften last year, but Mellon notes self-storage is “still in a good place.” He says he believes the biggest impact may be on those who are wanting to buy or need to refinance. “If current owners are in no hurry to sell, and they are locked into their rates, they should be OK. Owners with bridge loans or flexible rate loans that are coming due may face some headwinds.”
Gussis agrees that the major impacts right now have been with the self-storage buying and selling market, rather than with rates and occupancy. “In terms of transactional value, that’s way down,” says Gussis. “Sellers aren’t willing to take lower price when nothing has changed but the interest rate.”
Hill says while there are still loans to be found, banks are becoming more selective. “The rate hikes have really curtailed lending at large banks, they’re much more selective, focusing on bigger clients,” Hill says. Still, Hill adds if you want to buy or need a loan, it will be more expensive, but smaller local banks and credit unions are still lending.
Gussis says construction loans and development is down within the industry due to the rate hikes. “Everything else such as labor and materials have also gone up, so it’s harder for developers to make the numbers work,” says Gussis.
Sonne concurs. “We’ve seen developers delaying projects in hopes of the interest rates coming back down.”
Swerdlin adds, “Developers have been hit harder than anyone as those loans tend to be personally guaranteed and they are riskier type of loans,” he says. “It’s very expensive for developers to buy the land and build right now. Many must pay cash and there aren’t many who can put up that kind of capital.”
What This Means for the Self-Storage Industry in 2023 and Beyond
On the question of how all this will affect occupancy and rates going forward, industry experts say some softening of the market was inevitable. “The self-storage industry has seen record growth year over year, growth that wasn’t sustainable,” says Gussis. “We may continue to see some softening, but I really don’t see any societal changes that would cause people to abandon units in large numbers. Even if there is a recession with job losses, people will still need self-storage.”
Swerdlin says another major difference between what is happening now and what happened during the Great Recession is that many operators anticipated a softening of the market. “I think many people within the industry have made cost cutting moves as if we’re already in a recession,” says Swerdlin.
As well, industry experts point out technology is much better at helping owners/operators adjust to the markets more quickly than they could in 2007. Sonne adds that the industry has changed so much in 16 years, it can’t really compare to what happened in 2007. “The industry measured by physical occupancy then and now it’s all about economic occupancy or cash flow,” Sonne says.
Experts think current owners will likely be alright unless they need to borrow a huge amount capital soon. Those wanting to purchase existing storage facilities may still be OK, especially if the facility they are purchasing hasn’t been managed smart and can be improved to show gains with strategic rate increases on existing customers, as well as increasing street rates.
Developers may still find the cost of building too high, but industry experts say that may be a good thing for existing operators, at least for a while. “One could argue this is a good thing for current operators who will have less supply coming into their market,” says Gussis.
Of course, no one can predict whether the feds will continue raising rates or if we will dip into a recession, but industry experts have a similar feeling that if both happen, it will not be as deep or as long as the Great Recession.
“We are in a period of uncertainty right now,” says Hill. “I think once some clarity comes, we’ll be in a better position to know how this may ultimately affect the industry. But I do believe if we are able just work through this year, things will start to even out again.”