Stability. That is the word that brokers at Cushman& Wakefield are using to describe the self-storagemarket performance in San Diego through the pandemic. In the lastthree months, a decline in move-outs has offset new leases, keepingboth rental rates and asset values stable. However, the market isnot immune to economic changes.

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"Most self-storage owners are reporting solid operating resultsso far," Greg Wells, managing director of theself-storage advisory group at Cushman & Wakefield, tellsGlobeSt.com. "While leasing activity has slowed in some areas, sohas move-out activity, keeping occupancies steady. California hasenacted some fairly strict policies regarding evictions during thiscrisis and delinquencies have risen some in most areas. In SanDiego, and Southern California in general, the new supply pipelinehas been manageable so most stabilized projects are not seeing amajor impact from the new supply and those new projects are leasingat or near the original projections."

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Equally, cap rates and asset pricing has remained stable sincethe onset of the pandemic. "Cap rates for stabilized assets haveremained relatively stable since the pandemic," adds Wells."Investors are certainly more cautious right now so underwriting onprojects still in lease-up has become more conservative. Investorsmay not have changed their yield requirements much, if any,however, they are looking at longer stabilization time frames andslower rate growth, which is impacting current valuations."

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While most properties have yet to see an impact, new propertiesin lease-up have seen an decrease in valuation. "Projects that werein some stage of lease-up have seen more impact to the valuation asinvestors have become more conservative and cautious aboutunderwriting rental rate growth in the near term," MikeMele, vice chairman of the self-storage advisory group,tells GlobeSt.com. "Unless a developer was 'past the point of noreturn' most new development has been put on hold. This slow-downin new construction should help keep occupancies stable and provideopportunities for rental rate growth as the economy starts toreopen on a broader basis."

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While the market has remained stable, investment activity hasslowed significantly. "Because of the uncertainty of how thepandemic was going to impact the overall economy, virtually all ofthe active institutional players in the self-storage space hit thepause button a few months ago," says Wells. "Some are still on thesidelines until they feel there is more clarity in the market,however, some have started get back in the market and are going tobe more selective in the assets they offer on. California inparticular will be a target market for investors because of lowernew supply levels as well as long term rent growth potential."

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However, investors are starting to reenter the space. "Now thatthe self-storage sector is proving to be resilient in the crisis,investors and lenders are starting to come back to the market,especially for well-located, stabilized assets," adds Mele.

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Overall, the self-storage sector is stable, but no asset classis completely immune to the impact of an economic dislocation."While we believe it to be a very resilient asset class duringdownturns, if the economy suffers from long-term unemployment and aprotracted recession, the sector will be impacted," says Wells."Because of the fundamental aspects of the business, including MTMleases, ability to lower and raise rents quickly to meet the marketand maintain occupancy, low cap-ex, disruption increases supply,etc. self-storage should provide a more stable opportunity thansome of the other asset classes."

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However, the market should bounce back quickly. "The operatingfundamentals so far have held quite strong in the self-storagespace and because of this, it will remain a favored asset class forinstitutional equity, regional equity and the REITs," adds Mele.Lenders are very comfortable with the product type and itsfavorable outcomes in the last recession as well as it performanceso far during the pandemic. Businesses downsizing, the potential offoreclosures, families downsizing into smaller homes or apartments,etc. also creates more demand for self-storage. These factorsshould help keep cap rates stable and investment activityhigh."

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Kelsi Maree Borland

Kelsi Maree Borland is a freelance journalist and magazine writer based in Los Angeles, California. For more than 5 years, she has extensively reported on the commercial real estate industry, covering major deals across all commercial asset classes, investment strategy and capital markets trends, market commentary, economic trends and new technologies disrupting and revolutionizing the industry. Her work appears daily on GlobeSt.com and regularly in Real Estate Forum Magazine. As a magazine writer, she covers lifestyle and travel trends. Her work has appeared in Angeleno, Los Angeles Magazine, Travel and Leisure and more.