Analysts Assess Coronavirus Impact on Self Storage

By Laura Williams-Tracy, SSA Magazine

The global coronavirus pandemic is upending markets and throwing uncertainty into every aspect of business. The Federal Reserve delivered a surprise rate cut on March 3 and again on March 15 to near 0 percent, which only served to upset markets further.  

The lean operating model for self storage has meant that many facilities have been able to remain open for customers even as communities imposed restrictions on gatherings of more than 10 people. So far, self storage is battered but appears to be weathering the turmoil better than other commercial real estate sectors.

According to data from Green Street Advisors, from February 21 through March 17, commercial property values are off an estimated 24%. The measure is based on questions of how likely tenants will be able to pay the rent.

Senior housing lost the greatest value, down 49% over that 25-day period. The smallest losses were in trusts specializing in self storage (-16%), cell towers (-13%) and data centers (-11%).

Overseas investors looking to the U.S. for stability in a time of worldwide economic tumult appeared to be gravitating to niche stocks such as self storage, according to BizNow.

As of March 18, the FTSE Nareit Self Storage Index was down 12.28%, month to date. The FTSE All REITs Index had dropped 27.13% during that same time. The S&P 500 lost 18.73% over the same period.

A factor buoying the asset class is lower tenant turnover than other property sectors, keeping it less vulnerable to economic shocks, The Wall Street Journal reported.

As was seen in the Great Recession of 2008 and 2009, hard times cause people to downsize from larger houses or apartments, and they still need places to keep their possessions. During that recession, the NAREIT All Equity Index lost roughly 40% of its value across all sectors while self storage REITs returned 5%.

It’s unknown what the oversupply in some markets could mean this time.

The industry is not impervious to risk, according to a report by Fitch Ratings. New lease demand for self storage may be vulnerable to supply chain disruptions, which drives down the use of self storage space by commercial tenants. But the Fitch report surmised that consumers would be skittish about moving stored items during a health crisis. That lack of movement out of self storage might balance weaker demand among commercial customers. The Fitch report said the situation is the opposite from other sectors that depend on short-term rentals, such as hotels, which are seeing an outsized negative impact.

Despite COVID-19, real estate investment activity remains positive, according to a report on the pandemic from real estate firm Marcus & Millichap. Declines in interest rates will support refinance and acquisition activity. Investors have been able to lock in debt in the 3% range. The reduced cost of capital has not translated to higher property valuations or lower cap rates as many sellers hoped because the virus does create additional uncertainty for many buyers.

Commercial real estate yields and investment activity should remain stable, the report continued. Specifically to self storage, Marcus & Millichap predicts coronavirus will have little if any impact on demand for self storage units. The national average vacancy rate closed at 9.9% at the end of 2019. It is expected to drive to 10% in 2020 because of elevated supply delivery.