By R. Christian Sonne

autious optimism prevails for the self-storage asset class for improvement in operations and cap rates in 2024. As a result, our 4Q 2023 Self Storage Investor Survey increased an average of only 7 basis points this quarter to an average stabilized cap rate of 5.75 percent. This reflects a total of 53 basis points increase since our 4Q 2022 Investor Survey. Another highlight characteristic is that the survey indicates Class-A cap rates are essentially flat from the Q3 2023 data. The Q4 2023 data is focused primarily on overall capitalization rates, terminal capitalization rates, and discount rate (IRR). Key performance indicators are shown in the Segmentation by Investment Quality table.

(See Segmentation by Investment Quality Table)

Many survey participants noted a gloom mentality about macro-economic conditions, despite data indicating otherwise. As pointed out in The Economist (January 20-26, 2024, page 17), “Inflation has slowed sharply, petrol prices are down, jobs are plentiful, incomes are rising, and the stock market is strong.” Yet, consumer sentiment index from the University of Michigan has shown low levels the last two years. Such low levels have not been seen since the global financial crises in 2007 to 2009. According to The Economist, despite an increase in December, the index remains 30 percent below the peak in early 2020 before COVID-19.

Perhaps it explains declining asking rents of 2023. Even in an environment of declining asking rents, actual rents increased significantly above inflation levels in 2023. Hence, the “cautious” optimism of market sentiment. Many expressed a belief that the Fed will lower rates, leading to a better lending environment resulting in lower cap rates and an improved transaction market. A great analysis of the 2023 environment and asking versus actual rates was put together by Aaron Swerdlin and his team at the Newmark Self Storage Practice from PSA Quarterly and Supplemental Public Filings summarized as follows:

(See Public Storage Same-Store Rental Activity Chart)

In summary, the Public Storage (same-store) data shows self-storage rental growth rates or actuals were 39.89 percent from Q4 2020 to Q3 2023, while street or asking rates increased only 7.77 percent in the same time period. From Q2 2022 to Q3 2023, SS Rental Income Growth or actual rents increased 9.8 percent, while street rates or asking rates declined 18.40 percent.

This highlights the importance of understanding the self-storage asset class, and it is another metric of resiliency even in a year (2023) of reversion to the mean or adjustment. Simply running an internet search on asking rates provides erroneous results of actual rents.

The self-storage team at Newmark Valuation & Advisory surveyed over 50 market participants about a wide variety of data points, including market sentiment, marketing time, and outlook. Survey participants include buyers, brokers, owners (small and large operators including REITs, national and regional owners), investors, lenders, and REIT analysts. Most interviews were in person, by telephone, or electronic conferencing.

The 4Q 2023 Investor Survey is also an indicator of market sentiment that 2024 will be a year of “significant improvement,” according to one participant. Many investors expressed confidence that interest rates will decline by Q2 2024 and the 2024 rental season will be superior to 2023, reflecting a return to patterns experienced prior to the pandemic—soft landing, not a recession. Based on our 3Q 2023 Investor Survey, participants remain cautiously optimistic about self-storage.