By Chris Sonne

elf-storage cap rates increased an average of 21 basis points in 2Q 2023 to 5.56 percent, an increase of 34 basis points since 4Q 2022 based on our quarterly Investor Survey. 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 2Q 2023 data is focused primarily on overall capitalization rates, terminal capitalization rates, and discount rate (IRR). Key performance indicators are shown in the following table:

Sales volume of single assets has declined by over 60 percent in year-over-year analysis, with most transactions occurring at the $5 million price point or less. Yet, market sentiment remains cautiously optimistic, with the biggest concerns of sector performance not related to the asset itself but to exogenous factors such as continued tightening in lending, further Fed increases, and macro-economic conditions. Institutional investors like the self-storage asset class as indicated by the largest transaction in the history of the asset class with the merger of Extra Space Storage and Life Storage.

Self-storage is not immune to market conditions of commercial real estate but remains resilient to downward trends. Early indications of operational activity this summer indicate a slower rental season than expected or even typical of prior years. And there are concerns of acceleration in the increases of cap rates. On the other hand, supply and demand conditions are generally in balance (varies by trade area) with muted new construction. The general outlook is satisfaction with self-storage investments.