Check out this headline of a weekly conference call put on by Newmark Knight Frank, one of the largest self-storage brokers in the US. Below is a recap of a weekly conference call put on by Newmark Knight Frank, one of the largest self-storage brokers in the US. Each week they invite a number of industry experts to comment on how the COVID-19 crisis is affecting their business and the trends they believe will define the future of self-storage.
Collections and move-ins hold strong, with some operators surpassing last year collection levels and some hitting 95% of projected rent while move-ins have taken a natural hit due to the inability of customers to have full mobility as in normal times; at the same token, move-outs have declined, with both expected to pick up once the stay-at-home order is released.
Self storage is one of the better performing product types compared to other commercial real estate and the virus has provided a great opportunity for the sector to reaffirm its defensive characteristics; stabilized properties are holding occupancy and continuing to generate cash flow.
Below is the full recap of the call:
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Self Storage REITs Resilient
As of the week of April 27th, Self Storage REITs are the 4th best performing sector across all REITs (behind data centers, industrial and manufactured homes) with significantly better performance compared to the overall REIT space, down 11% in stock price compared to a 22% decline in REITs overall.
Performance is down 3.6% for the month of April while the investor base focuses attention to distressed opportunities that have become available from sectors like malls and lodging that were early casualties in the pandemic.
Stable but Disruptive
Collections and move-ins hold strong, with some operators surpassing last year collection levels and some hitting 95% of projected rent while move-ins have taken a natural hit due to the inability of customers to have full mobility as in normal times; at the same token, move-outs have declined, with both expected to pick up once the stay-at-home order is released.
Auto-pay customers have proven reliable for rent collections.
Occupancy is holding steady, up 20-30 bps over last year although not at typical levels above January.
Biggest disruptions are with the changing customer behavior and with normal operations where existing customer increases and evictions have been paused and will likely remain so through at least May.
Covid-19 Impacts
Business continuity has not seen huge impacts as most all stores remain open, although with a contact-less environment implemented and a greater focus placed on strategic ways to communicate with customers to promote collections.
Less than 5% of employees have opted to take FMLA, most that have are due to childcare reasons.
Operators are showing importance of human enterprise with constant communication with employees as well as incentives that include $500-$1000 in bonuses paid at the onset of the pandemic, with another round planned in the next 2-4 weeks, which has created great momentum and morale to finish the year strong.
PPP loans - numerous operators have successfully applied for and received funds from PPP; there are several steps necessary to covert the loan to forgiven, much of it dependent on what you do after receiving it however there is still ambiguity on those requirements that will remain through the full 8 week cycle.
Operations
May is typically an active month presenting occupancy gains as the leasing season gets going with a push to both market rent growth and in-place growth however this year is expected to be somewhat muted as the stay-at-home order remains in place; operators in markets that are re-opening will be monitoring consumer trends closely throughout the month.
In-place rent increases will have an opportunity to come back once delinquencies are normalized and activity resumes.
Cap Rates
Expectations for returns remain at pre-covid levels for stabilized assets, likely even compressed for uber-core assets.
With the product type remaining attractive during challenging times, cap rates could compress compared to other product types.
Broker Opinions of Value (BOVs) are focused on value pre-covid and updated on a regular basis as April and May collections become known; properties that have minimal change in performance could gain value as a result of the crisis.
Capital side is ready for core assets now; with April collections relatively in line with expectations, May will be a telling month for confidence in valuations.
Many groups are preparing to go to market as soon as the market opens to take advantage of the capital on the sidelines waiting to enter or expand in the sector.
- Related: What is a self-storage cap rate target?
Debt Markets
For stabilized deals with decent debt yield and coverage ratios, debt is active and looks more in the 55-60% leverage range at 4.25-4.50% all in rates; relationships matter more than normal to get deals done however as the corporate bond market continues to settle, more lenders will be actively focusing on new loans rather than managing existing portfolios.
The conduit market is frozen, with quotes in unrealistic ranges as the full risk spectrum for the space remains unknown.
Debt funds are currently on the sidelines as their underlying financing isn't as available as historically.
Moving forward, lenders will place greater scrutiny on underlying operating performance and have more strings attached in the terms (recourse, amortization, less proceeds, more terms overall, etc).
Markets to Watch
Unemployment numbers and projections at end of all of this are staggering; those markets hit hardest by the economic impacts from covid will be the new worry spots for the sector; markets that have a high concentration of the oil industry, services industry or in the hospitality and leisure sectors will be hot spots for prolonged concern.
New Supply
While new supply that is already under construction is expected to deliver, a fair amount of attrition is expected in pipeline development deals, reducing the overall impact to saturation levels in various markets across the U.S.
Post-Covid Operations
Temporary Implications: Social distancing procedures will continue with corporate employees working from home and on-site employees maintaining no-contact guidelines and extensive cleaning procedures; in-place tenant actions (rent increases, auctions, etc.) will remain on pause.
Long-term Implications: The forced move to a greater use of technology will push the sector to continue utilizing technology moving forward, although may not be at the current heightened levels; Marketing strategies will continue to gain sophistication and consumer usage will grow as the flexible nature of the sector shines during challenging times.
Appraisal Underwriting is Cautious
Valuations are focused on the trade area fundamentals and the operating performance of the property; in strong markets the short term forecasts are keeping growth stable in the first year and will continue normal forecasts thereafter.
Absent price discovery from deals remaining on pause, there are no data points for cap rates and yields to determine a definite change to values yet. As a result, cautious underwriting includes slowed NOI growth projections and placed a downward pressure on IRR and exit cap rates.
Virus Resistant
Self storage is one of the better performing product types compared to other commercial real estate and the virus has provided a great opportunity for the sector to reaffirm its defensive characteristics; stabilized properties are holding occupancy and continuing to generate cash flow.
Investor sentiment remains that the sector as a whole is performing reasonably well, and although not insulated from impacts, it remains resilient and will continue to push its way into becoming a core food group.
The flexible, optional nature of the product combined with a consumer driven economy will continue to increase the need for storage and its usage rates across generations.
Biggest headwinds in storage are new supply and interest rates; with the current low interest rate environment that is expected to remain for the foreseeable future and a reprieve of additional new supply, the sector is well-poised to bounce back fairly quickly absent unknown headwinds.
- Related: Death, Taxes, and Other Reasons to Invest in Self-Storage