Monday Morning Quarterback (01/25/2021)

January 25, 2021

A-Rated Facilities Outperform:

The pandemic’s impact on the economy resulted in variable transaction volume across property classes. Nationwide, sales activity for Class A self-storage properties fared substantially better than both B and C rated facilities. During the first nine months of 2020, the total amount of self-storage transactions shrunk by 16.3% y/y for Class A facilities, while B and C classes had year-over-year declines of 44.7% and 43.2%, respectively.

U.S. Average Storage Sale Price Per Sq. Ft: YoY Change

1H20 Transaction Activity:

1Q20 self-storage sales volume was higher, year-over-year, compared to the first half of the year. The growth was driven by a 30%+ increase in pricing power, which overcame a 19% drop in the number of facilities sold. However, the uncertainty surrounding the pandemic killed the velocity of CRE transactions, including self-storage. Between the first three quarters of last year, the steepest drop in self-storage transactions occurred in 2Q20, when the number of deals fell from 267 in 2Q19 to 78. The significant slowdown in sales activity, in addition to downward pricing pressure, resulted in sales volume a little higher than the same quarter in 2Q19.

2H20 Transaction Activity:

Nonetheless, self-storage bounced back in the last half of the year. After showcasing its economic resilience through relatively strong second-quarter earnings, the industry began to reinforce and build interest among investors. As a result, transaction volume surged by over 60% from 2Q20 to 3Q20. On a year-over-year basis, sales volume still fell 38%. However, the number of transactions only dropped by 14%, compared to the same period a year before. In the final quarter of 2020, several significant acquisitions were made, including 1) CubeSmart’s $540 million (low-3% cap rate) acquisition of the Storage Deluxe portfolio, 2) Simply Self Storage’s $1.2 billion (mid-4% cap rate) sale to Blackstone, and 3) Bill Gates’ fund, Cascade Investment’s capital infusion into StorageMart which will allow the $2.7 billion company to expand from 225 to 325 locations.

U.S. Self Storage Sales Volume (Mil)

Self-Storage Supply Still Rising:

On the supply side, self-storage properties in the planning stages or under construction comprised 8.3% of existing inventory, a 10 bps gain from November. The number of abandoned projects in the new supply pipeline rose by 5% to 23 in December. The continued rise in abandonments could foreshadow a slowdown in self-storage development later this year.

Under Construction & Planned Percent of Existing Inventory

Street Rates Accelerate in December:

On Monday (January 18, 2021), Yardi released the December edition of the national self-storage report. During the month, both climate controlled (CC) and non-climate controlled (non-CC) street rates improved across the nation, while development activity continued to grow steadily. Non-CC unit rates rose by 3.5% y/y and CC units by 2.3% y/y, marking the second month of year-over-year (y/y) growth in CC unit rates. Before October, 10×10 CC unit rates had not risen on a y/y basis in roughly three years. In December, annual street rate performance for 10×10 Non-CC units was positive in 94% of top markets tracked by Yardi – a considerable improvement from 81% in November.

December 2020 Year-over-Year Rent Change for 10'x10' Units

Unemployment Claims Remain Elevated:

For the week of January 11, 900,000 Americans filed for unemployment insurance, falling 3% from the preceding week’s revised level of 926,000. Unemployment claims, a proxy for layoffs, have stayed above the pre-COVID peak of 695,000. According to records dating back to 1967, layoffs during the pandemic have been higher than in past recessions. Despite an elevated level of unemployment, economists have estimated that spending and hiring will improve later this year. According to a Wall Street Journal survey conducted this month, if $1.9 trillion in fiscal stimulus passes Congress and vaccination efforts are successful, economists project that the U.S. GDP growth will hit 4.3% y/y in 4Q21, up from a 3.7% forecast in the prior month’s survey.

Initial Claims for Unemployment Benefits

Paycheck Protection Program:

On Tuesday, the Small Business Administration (SBA) approved ~60,000 borrowers for over $5 billion in forgivable loans in the first week of the rollout. After closing last August, the Paycheck Protection Program (PPP) reopened on January 11 with $284 billion to help small businesses.

To ensure the SBA properly disseminates the loans for small businesses, the organization tightened security to prevent big companies from receiving these loans. To tighten the security, the SBA will no longer automatically approve loans and requires a background check for every applicant. Additionally, to aid small businesses, the SBA gave small lenders exclusive access to the first wave of applications.

With these new measures, the PPP is successfully providing funding for small businesses. During this year’s round, PPP loans averaged $20,000 for first-time borrowers and less than $75,000 for second-time borrowers.

Previously, a lack of security and confusion over the program’s rules allowed large businesses to obtain these loans. With the average loan being $206,000, the first round of funding was depleted in less than two weeks. Following an investigation into these illegal loans, 57 people were charged with attempting to steal $175 million in total.

COVID Cases & Deaths Decelerate:

On Wednesday, both coronavirus cases and casualties hit new milestones. On the one hand, the seven-day rolling average of infections dropped below 200,000 for the first time since December 31. On the other hand, the U.S. pandemic death toll hit another daily record on Wednesday, surging to nearly 4,500. Nonetheless, both COVID cases and casualties fell on a week-over-week (w/w) basis dipping 21% and 7%, respectively. As of January 24, approximately 25 million Americans have been infected at least once, and over 416,000 have died.

Chart of New Coronavirus Cases Reported per Day

Chart of New Reported Coronavirus Deaths per Day

What’s Ahead:

This week, the Federal Open Market Committee (FOMC) will convene on Wednesday. The FOMC will likely leave the federal funds rate between 0.00%-0.25% and continue to make asset purchases of $120 billion a month. In the press conference following the meeting, Federal Reserve Chair Jerome Powell will likely reiterate that the pace of quantitative easing will continue until the Fed sees a “substantial” improvement in the jobs market. On Thursday, U.S. GDP for the fourth quarter will be released. According to Raymond James Chief Economist Scott Brown, real GDP is estimated to have grown at a decent pace in 4Q20, reflecting strength in October. Looking ahead, 1Q21 economic activity should be more modest due to pandemic business restrictions.