Distressed Rates Are Up – But Not For Self-Storage

Schadenfreude: It’s a German word combining “harm” and “joy” that describes the satisfaction some gain by watching someone or something else, that is very successful, suddenly struggle.

It’s hard to not think of self-storage in this way. It was the darling of reporters and media outlets, especially when Covid hit. “Look at this little industry that could during a global pandemic,” they said. “Investors, unite!” they recommended. 

Then something happened. The pandemic was old news. And now it was time to put self-storage in its place.

So, headlines about demand being down, development being banned, and the industry being predatory with pricing have abounded. While these things need to be reported on, and we’ve done so ourselves to be fair and unbiased, there seemed to be some glee taken with each new report by some outlets.

About this time last year, the Wall Street Journal headlined the story “Self-Storage Rents Fall Record Amount As The Post-Pandemic Boom Cools.” MSM responded, noting that this was simply a return to the norm. This May, the New York Times headlined a similar story, “Americans Went All-In on Self-Storage, That Demand Is Suddenly Cooling.” They cited “a staggering amount of abandoned self-storage construction projects,” while failing to acknowledge that the drop in demand was, again, correcting a previous imbalance and actually beneficial to some markets. So we sent them Our Self-Storage Almanac.

“Look,” says Chris Sonne with Newmark Capital Investments, having a laugh and waving away some of the negativity with a big hand. “Self-storage has outperformed the office, industrial, retail, residential, diversified, health care, lodging/resorts, mortgage REIT, timber, infrastructure, data centers, and specialty sectors for 30 years. That’s an impressive accomplishment and long reign.”  

Sonne’s take was further confirmed with a new report from CRED iQ.

Distressed Rates Across Sectors

CRED iQ, a data, analytics, and valuation partner that helps commercial real estate professionals uncover financing, leasing, and investment opportunities, published a report on September 5th that highlighted distressed rates by property types. To arrive at its conclusions, the company looked at two indicators of distress: Delinquency rate and specially serviced rate. The index includes any loan with a payment status of 30+ days delinquent or worse, any loan actively with the special servicer, and includes non-performing and performing loans that have failed to pay off at maturity.

It concluded that distressed rates for most property sectors reached a sixth-straight record-high, increasing from 8.8% to 9.1% over the past month. A notable exception? Self-storage.

Some highlights from the full report:

• Multifamily increased to 11%, a “dramatic 260 basis point increase in one month.”
• Office jumped to 13%, the highest overall distress level.
• Retail improved slightly, from 11.8% to 10.6%, settling in at third place. 
• Industrial witnessed a big jump, from 1% or less in recent months to a concerning 4.6% (This increase, however, is largely attributable to one SBLL portfolio valued at $2.18 billion backed by a 138 industrial and office/flex property portfolio, which defaulted after failing to payoff at maturity). 
• Hotel crept up to 8.4%, a minor uptick but a drop from the high of 9.4% in May.
• Self-storage stayed the course, performing with nearly zero distress, coming in at 0.1%, even down from 0.2% the month prior. 

The stability of self-storage is further reflected in this following chart. Self-storage, in red, sits at the bottom, unmoving other than a January surge, “when a $2.1 billion loan backed by a 112,084 safety-first portfolio consisting of 16 self-storage properties throughout New York City. The loan passed its January 9, 2024 maturity date, but continues to perform." By February, one month later, everything was back on track. 

“The spike in January 2024 due to the delinquent loan just highlights that while the asset class is strong, no investment is foolproof,” says James McLean, market analyst with New York City-based Union Realtime, the developer of Radius+, a comprehensive site selection and location intelligence platform for self-storage. “That’s why networking and collaborating with the wealth of industry professionals who have been doing this for decades, and often across multiple-generations, can save newcomers and veterans alike significant amounts of money and headaches. The people are what makes self- storage such a great industry!”

Adds McLean, “Its resilience to recessions is just the cherry on top!”

Tom Dao, a mortgage specialist with Gantry, acknowledges that this is a challenging market cycle for commercial real estate, but agrees that self-storage remains a bright spot for investors. 

“I continue to look for the signs of a weakening debt market for self-storage but have yet to see a meaningful change to the liquidity available to this asset class,” explains Dao, adding that Gantry continues to see strong interest in self-storage amongst capital providers. "As this interest grows, so has the sophistication of available information to track individual performance and market trends. This helps credit providers to analyze and be convinced that characteristics of self-storage supply and demand support the resiliency of cash flow... We use this information to be transparent about the performance and strength of self-storage as an asset class."

Ramey Jackson, CEO of Janus International, also attests to the strength of the self-storage industry. "Demand for additional self-storage supply continues to grow, as do opportunities for operators to strategically expand existing properties and to reinvest in their current portfolios," he says. "Owner operators in the self-storage industry have proven time and again that building in markets with unmet demand works—in nearly any economic climate."

The Case For Recession-Resilience

What makes self-storage so different from other property classes? One of the primary reasons it is so recession-resilient is its consistent demand, says Ilyssa Caretsky with Union Realtime, who authored an August report, How Self-Storage Is Recession Resilient. “People need storage space regardless of the economic climate. In times of economic prosperity, individuals and businesses often accumulate more goods, creating a need for additional storage. Conversely, during economic downturns, life events such as downsizing, job relocations, or consolidating households tend to increase, driving demand for storage solutions.”

She states that the industry’s low operation costs are another reason it remains strong when other sectors flounder. “The maintenance requirements for storage units are minimal and do not necessitate extensive staffing,” she explains. “This lean operating model allows self-storage operators to maintain profitability even when the broader economy is stressed.”

She adds that the industry’s ability to cater to diverse customers – from individuals to families, big businesses to small organizations – further lends itself to the success of self-storage. “Plus, operators can adapt quickly to changing market conditions. For example, they might offer discounts or flexible rental terms during a recession to attract and retain tenants, and they have the ability to do that due to low operating costs.”

Caretsky says that when things pick up, self-storage is also always poised to expand. “Compared to other real estate sectors, they can often expand to meet demand. Adding more units or converting existing spaces can be done with relatively low capital investment. This scalability allows investors to grow their portfolios and increase revenue potential without significant upfront costs.”

Looking Ahead

The future continues to look bright for self-storage and those investing in it. “Self Storage will absolutely remain recession-resilient through hard economies by virtue of it being a "needs-based" asset class,” explains McLean. “Demand is driven by displacement, downsizing, divorce, and death/disaster.  The first three are exacerbated during recessions, allowing self storage demand to remain high and perform better than other investment options.” 

Sonne concurs, but is quick to point out that when determining demand and feasibility, thorough data analysis is key. “Self-storage is more complex than people believe,” Sonne says. “Over the last 10 years there have been more institutional investors, so transparency is particularly important. It’s important to look at a lot of data to make good decisions for the future. Look at multiple data points for patterns. Always consider the source as well as the sample size, data collection methods, and margin for error before relying on the results.”

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Brad Hadfield is the web manager and an MSM news writer.