Wyatt Campbell shares insights with GlobeSt: Largest self-storage fund ever closes amid headwinds

Prime Group Holdings has closed its third flagship self-storage fund at a hard cap of $2.5 billion.

SAN DIEGO, CALIFORNIA (January 27, 2023) - The self-storage market is entering 2023 facing headwinds from flattening street rates, increased expenses, capital markets challenges, and the slowing economy.

“But operators remain optimistic about income growth coming from resilient demand and higher renewal rates while deliveries begin to subside,” Paul Fiorilla, Director of U.S. Research Yardi Matrix, tells GlobeSt.com.

That optimism is reflected in Prime Group Holdings’ recent announcement that it has closed its third flagship self-storage fund, Prime Storage Fund III at the fund’s hard cap of $2.5 billion, exceeding its $1.5 billion target.

Fund III, which closed in December 2022, is the largest fund ever raised focused exclusively on self-storage, the firm said.

Prime Group is one of the largest private owners of self-storage assets in North America. Since its inception, Prime Group has owned and operated over 320 self-storage facilities representing approximately 180,000 storage units and over 22 million rentable square feet.

Prime Group said in a release that it will aim to acquire self-storage assets in undersupplied markets across the US.

Slight Decrease in Asking Street Rates
Wyatt Campbell, Northmarq Vice President, tells GlobeSt.com that as with most real estate business lines, self-storage saw a bit of a slowdown both on the transactional and operational fronts coming out of Q4.

“The slowdown in transaction volume is mainly attributed to the dramatic swings endured in the lending market since the middle of last year,” Campbell said.

“Lenders have fresh allocations for the new year and strong appetites to finance self-storage facilities, so the outlook on that front this year is one of optimism.

“On the operational front, the majority of our clients have seen a slight decrease in asking street rates and a modest reduction in occupancy levels. They mainly attribute this to the housing market and overall market sentiment that storage is moving back to its traditional seasonality.”

Campbell said his clients remain confident the demand created over the past couple of years will continue.

“Self-storage, as an asset class continues to gain attention with more and more large institutional players either moving into the space or continuing to grow their presence in the space,” he said. “Traditionally seen as a fragmented market, we believe we will continue to see it become one of the main verticals in commercial real estate, especially in spring, traditionally a strong time for the sector.”

Current Rates are In Line with Expectations
At KeyBanc’s recent Self-Storage Investor Forum, panelists shared that they are pleased rates are in line with what was expected, Fiorilla said.

Furthermore, Fiorilla shared, “Business is good; the customers are there,” said a panelist at the New York Self-Storage Association’s 2023 Investment Forum, also held last week in New York.

“Operators at the two events generally forecast high single-digit increases in net operating income, with strong revenue growth tempered by unusually high increases in insurance, utilities, and labor costs.

“While solid, growth in 2023 will be a comedown from the unprecedented performance of the last two years when storage street rates and occupancy rates hit all-time highs and property values soared due to the robust fundamental performance and cheap cost of debt.”

No Longer Just for Death, Divorce, and Disaster
Nick Malagisi, SIOR and national director of self-storage for SVN Commercial Real Estate Advisors, tells GlobeSt.com that self-storage has proven time and again to be a resilient asset class unto its own.

“Self-storage users are no longer considered just for the three Ds of death, divorce, and disaster but now more mainstream as users come from all walks of life,” Malagisi said.

“It is no wonder that the asset class is drawing more institutional investors when it has out-performed almost every other asset class these last 15 years.

“The low-tech ‘mini warehouse’ of old is now the high-tech, sophisticated climate control self-storage facility aptly named an essential business during the recent pandemic where so many new users became acquainted with the product as working remotely meant finding a place at home and relocating a room of furniture into the nearby storage facility.”

Lenders Attracted to Self-Storage Segment
Tom Dao, principal with Gantry, tells GlobeSt.com that self-storage “checks a lot of boxes, and that bodes well for this asset type in the current market cycle.

“The commercial real estate investment market is still looking for relevant values that are consistent with sound real estate fundamentals and diversified cash flows, short-term leases offer opportunities to add value,” Dao said.

For Gantry, he said, nearly all its lenders are attracted to self-storage as an asset type.

“We continue to see great pricing on permanent and transitioning loans because of the market’s strong fundamentals and performance,” Dao said. “Life companies love self-storage, as do banks, credit unions, and Wall Street. However, the best rates are coming from insurance companies.”

The Number of Storage Users Increasing
The industry gained many new customers over the last two years that are expected to remain on board, Fiorilla said.

“During the pandemic, many people discovered self-storage,” another KeyBanc panelist said.

The pandemic-related growth in work-from-home created ongoing storage demand from individuals and businesses, while the length of existing customer stays is increasing. The bottom line is that the number of storage users is increasing, and many operators believe the boost to demand will be long-lived, according to Fiorilla.

Self-Storage Finding Added Tailwinds
Sher Hafeez, managing director of JLL’s M&A and Corporate Advisory team, tells GlobeSt.com that self-storage was one of the biggest beneficiaries coming out of COVID-19, as demand patterns for the sector shifted somewhat permanently to the sector’s benefit.

“We are seeing continued positive demand/supply dynamics benefiting self-storage owners and operators in 2023,” Hafeez said. “In fact, the recent slowdown in new supply driven by increased costs is an added tailwind and we expect that self-storage will be one of the best-performing sectors over the long term.”

Sector Sees Return to Normalcy
Cory Sylvester, principal at DXD Capital, tells GlobeSt.com that after several years of above-average growth, the self-storage sector is seeing a return to normalcy.

“While fundamentals are still solid, there has been an elevated number of renters that have been exiting their units in response to aggressive rental rate increases applied during the pandemic,” Sylvester said.

“At the moment, the new supply pipeline remains in check, as higher construction costs and limited financing options have curtailed the number of new facilities that developers are pursuing. In the acquisition market, higher interest rates have made it more difficult for the market to clear, as buyers and sellers are increasingly at odds which has decreased overall volume.”

Growth Will Come from Existing Tenant Rate Increases
Charles Byerly, CEO of Westport Properties, tells GlobeSt.com, “Self-storage revenues have peaked. As the housing market slowed in the second half of 2022, there was a direct correlation to a reduction in storage demand. With that, we are seeing asking rates coming down across the country.

“Fundamentals are still generally positive, and we expect a positive year-over-year revenue growth but receding significantly from what we have seen the past couple of years.

“Supply is still increasing in many markets across the country which will put additional pressure on asking rental rates this year and next year. We anticipate most of the growth coming from existing tenant rate increases as opposed to new street rate growth.”

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