By: Tom Dao, Andy Bratt, & Amit Tyagi
The CSSA Owner’s Summit on July 18, 2024, highlighted a cautious yet optimistic outlook amidst the headwinds of interest rate and political uncertainties.
Key Discussions
Interest Rates and Inflation
Future Interest Rates: A significant concern was the future direction of interest rates, with speculation about whether there will be one, four, or five Federal Reserve cuts next year. Potential rate cuts could impact the bid/ask spread for sales and acquisitions, trade volume, and the future of development.
Inflation Concerns: Despite the Fed considering other indices indicating cooling inflation, operators still feel its effects. Inflation remains a key driver of interest rates and operational decisions.
Customer Rate Increases
Balancing Rate Increases: Panels discussed the impact of existing customer rate increases on business and customer experience. Excessive rate hikes could lead to mass attrition and negative feedback, while insufficient increases could reduce investor yields and future investment prospects.
Sustainable ECRI: The consensus was that sustainable existing customer rate increases (ECRI) vary based on individual business circumstances.
Operating Expenses
Expense Projections: Rising operating expenses, including personnel, insurance, and maintenance, were a concern. Projecting higher annual expense increases from historical levels is prudent.
Focus on Revenue: Given the high-margin nature of the self-storage business, improving the top line offers better returns than merely cutting expenses.
Development Risks
Over Supply Concerns: The primary risk for self-storage development is over-supply. While utilization rates are increasing, customers are more price-sensitive amid rising living costs and job cut news.
Pipeline Challenges: Active developers are working on projects seeded over the last 24 months. In California, approval and inspection delays increase carrying costs and the impact of high-interest rates, with no new projects being added to the pipeline currently.
Financing Opportunities
Funding Availability: Self-storage developers and investors have access to various financing options. Regional banks offer viable construction debt with relationship strings like recourse and deposit accounts. Life insurance companies have participation structures for developers seeking favorable equity or higher-octane financing. Insurance company lenders, like those represented by Gantry, provide competitive financing for stabilized or near-stabilized facilities.
Acquisition Opportunities: Acquisition opportunities have improved compared to 2023. Despite dealing with negative leverage, there's healthy interest in self-storage assets as long as acquisition costs are below replacement costs.
Legislative Issues
Future Challenges: Key legislative issues include split roll, which could significantly impact commercial real estate values, rent control, and land use. The CSSA leadership, with member support, is actively addressing these concerns.
2025 Outlook:
Taking Risks: Most panelists agreed on the importance of taking calculated risks in 2025. The keynote speaker, Glen Stearns, emphasized focusing on opportunities despite current challenges, encouraging a mindset of finding the "pony" amidst the mess.