Marcus & Millichap

Self-Storage Investment Midyear Outlook

National Report, 2017 Midyear Outlook

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National Self-Storage Performance Trends

  • The self-storage industry downshifts from a pace of rampant expansion to a more moderate, sustainable growth trajectory. The underlying demand for storage continues to strengthen; however, mounting supply pressures are a growing concern. Though new supply has not been enough to overwhelm pent-up demand, construction may have a greater impact as we move further in the development cycle.
  • Positive demographic trends and the strength of the multifamily market will stimulate further need for storage space. Strong population growth and rising incomes foster a broad and widening tenant pool. In addition, the retirement and downsizing of baby boomers plus the continued emergence of millennial households will sustain demand for self-storage.
  • The incredible run of vacancy compression seen during the recovery is forecast to bottom out at a historical low this year. Moving forward, further tightening of U.S. vacancy will be problematic in the face of supply-side headwinds, which may lead to additional concession usage and a softening of revenue growth.
  • Many of the self-storage REITs have tempered their growth expectations for the coming year as the benefit from improving vacancy moderates and rent growth moves from peak levels to more historically normal trends.

Investment Overview

  • The underlying drivers of self-storage demand remain in place, sustaining investor interest. Buyers still want to acquire properties and expand portfolios, though they are being more cautious with their underwriting and showing resistance to elevated prices.
  • While buyers are tempering their price assumptions, sellers’ expectations remain relatively high. This divide may widen moving forward as buyers lower their revenue growth projections and become increasingly unwilling to pay up for past performance.
  • A pullback in purchasing from the major REITs will present opportunities for small to mid-size investors. Regional institutional groups with private equity may fill the void, exploring secondary markets and older properties.
  • The rising interest rate climate will likely bring lower cash-on-cash returns and put upward pressure on cap rates. In addition, interest rate increases coupled with stricter lending requirements will raise the cost of acquisition financing, which may weigh on deal flow.

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