San Diego Self Storage Market Has No Negative Impact, Yet

Stability. That is the word that brokers at Cushman & Wakefield are using to describe the self-storage market performance in San Diego through the pandemic. In the last three months, a decline in move-outs has offset new leases, keeping both rental rates and asset values stable. However, the market is not immune to economic changes.

“Most self-storage owners are reporting solid operating results so far,” Greg Wells, managing director of the self-storage advisory group at Cushman & Wakefield, tells GlobeSt.com. “While leasing activity has slowed in some areas, so has move-out activity, keeping occupancies steady. California has enacted some fairly strict policies regarding evictions during this crisis and delinquencies have risen some in most areas. In San Diego, and Southern California in general, the new supply pipeline has been manageable so most stabilized projects are not seeing a major impact from the new supply and those new projects are leasing at or near the original projections.”

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

While most properties have yet to see an impact, new properties in lease-up have seen an decrease in valuation. “Projects that were in some stage of lease-up have seen more impact to the valuation as investors have become more conservative and cautious about underwriting rental rate growth in the near term,” Mike Mele, vice chairman of the self-storage advisory group, tells GlobeSt.com. “Unless a developer was ‘past the point of no return’ most new development has been put on hold. This slow-down in new construction should help keep occupancies stable and provide opportunities for rental rate growth as the economy starts to reopen on a broader basis.”

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

However, investors are starting to reenter the space. “Now that the 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.

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

However, the market should bounce back quickly. “The operating fundamentals so far have held quite strong in the self-storage space and because of this, it will remain a favored asset class for institutional equity, regional equity and the REITs,” adds Mele. Lenders are very comfortable with the product type and its favorable outcomes in the last recession as well as it performance so far during the pandemic. Businesses downsizing, the potential of foreclosures, families downsizing into smaller homes or apartments, etc. also creates more demand for self-storage. These factors should help keep cap rates stable and investment activity high.”